Pay Transparency Laws Are Now a Thing In California. Here’s Why You Need A Comp Philosophy Right Now
By: Jen Wolf
If you’re a founder in the state of California with at least 15 employees, the new pay transparency laws will directly impact how you hire and retain employees right now.
Overall, I believe this is a step in the right direction for our industry. It is difficult to determine whether you are underpaid if you don’t know the pay range.
As a founder, it’s crucial for you to comply not just because your company could be subject to legal penalties, but also because pay transparency has beneficial long-term effects for both employees and employers. Plus, it’s better to get ahead of the law instead of dealing with the consequences later on.
“It’s inadvisable for startups to ignore or try to circumvent pay transparency laws,” said Livingston Miller, our general counsel. “Founders should proactively focus on implementing any necessary changes to ensure employees are compensated equitably.”
Pay transparency laws have been created to reduce gender and race pay gaps in companies so that women and minorities have a better chance of competing fairly in the labor market.
Throughout my career, I’ve encountered many situations where I discovered that someone on my team made more than me. This typically happens when I get promoted to manage a new team, and HR sends me a spreadsheet of direct reports along with their salaries. In each instance I encountered, someone (usually a male employee) reported to me but had a higher salary.
This scenario happens often. According to the most recent Census Bureau data, women earn about 82 cents for every dollar a man earns. The pay gap widens when you include white men vs. women of color.
Female-to-Male Earnings Ratio (1960 to 2019)
Source: US Census Bureau
Think: If women received equal pay, the country’s economy would grow by an estimated $482 billion, and the poverty level of working women would be reduced by half.
With the emergence of pay transparency laws, employees don’t have to wait to receive information to determine whether they may be underpaid.
Developing Your Company’s Compensation Philosophy
Founders should also pay attention to these laws because it is a growing trend that will continuously impact your business if you don’t get ahead of it.
There are currently 17 states in the US that have pay transparency laws. With more states likely to pass similar laws in the future, developing a compensation philosophy is now more important than ever.
Tiffany Foo, our head of talent, is advising our founders to prepare for more employees wanting to discuss compensation with their peers and supervisors. These conversations don’t have to be awkward. You can start by ensuring your data is solid by doing a comp audit. Are there any outlier employees that need to be adjusted to align with your comp bands?
“Pay transparency is one actionable step in creating pay equity,” she said. “Talking about salaries and the financial value an individual brings to an organization can be challenging, but having open and honest conversations can improve perceptions of fairness and help employees trust their managers.”
Think of your compensation philosophy as a framework that outlines the guiding principles around how you should pay and motivate employees. For example, what you don’t want to do is hire three engineers on the same team, all with different compensation packages.
Our advice for early-stage startups is to develop a tier system that balances equity and salary based on risk. Earlier employees tend to get more equity and less salary because the risk is higher in joining a three-person company. But as the company progresses, the risk is slightly reduced, and you can offer more salary.
The biggest mistake I see is when founders take a “set it and forget it” approach to compensation. A comp system should be a living entity that needs to be reassessed annually in the context of where the business is, how much risk has been removed, and how much money has been raised.
Having a well-thought-out comp plan not only helps you hire and retain the best employees but also helps maintain trust from the start.
We’ve all been in situations where a last-round candidate is negotiating their salary range with the hiring manager. In this situation, I always tell startup founders they should be upfront right from the beginning about the pay range because eventually, your employees will go out to drinks, and the topic of pay will come up.
Without trust from the beginning, employees will waste time trying to figure out what their peers are making, and why they are not the more compensated employee. If your hiring process is not transparent from the start, employees are more likely to quit within six months, according to PayScale.
A compensation philosophy is also important because your best employees will want to know their career ladder and how they can climb to the next level. So even if you are an early stage startup with under 30 employees, it’s still essential to create roles with titles and pay ranges for each level.
“Centering pay equity in your compensation philosophy is more than a compliance box check, and more than a moral responsibility; it also has profound implications on your organization and our society at large,” said Tiffany. “With more than 20% of Fortune 500 companies based in California, this new law may be the tipping point that turns salary transparency into a standard practice.”
Next Steps You Can Take As a Founder
If you are an employer in California, there are several steps you can take now to ensure you are complying with the new law, according to Gunderson Dettmer, a law firm headquartered in California.
- Work with an employment attorney to conduct a pay equity audit on current salaries.
- Develop a plan to implement salary corrections when appropriate. Don’t wait for employees to approach you first.
- Review all job postings to determine a pay scale.
- Begin including pay scale information in job descriptions.
- Capture and save job titles and salary information for all current employees.
In addition, Tiffany Foo and Kat Steinmetz from our talent and culture team recommend the following tools and resources for companies/ employers:
- List the Damn Salary Ranges
- Buffer Transparency Resources
- Comprehensive.io Resources
- Lattice Compensation Benchmarking Article
- Open Comp: Pay Transparency Playbook
- Sequoia’s 2022 Cash & Equity Policies Report
- Don’t Forget Equity (stock option grants)! 64 cents on the dollar: Inequity in Female Software Engineers
Resources for employees/ job seekers: