What the New 2023 Pay Transparency and Disclosure Laws Mean for Your Business

California and New York City are the latest regions in the U.S. to adhere to the recent regulatory updates and pass salary transparency legislation for job applicants. California’s SB 1162 and New York City’s Local Law 32 both require employers of a certain size (more than 15 employees in California and four or more employees in NYC) to provide wage ranges for job postings.

California’s new legislation goes into effect on January 1, 2023, whereas the NYC rule became effective November 1, 2022. Many other states or cities in the U.S. require some form of pay transparency, including Colorado, Rhode Island and Washington.

Some of the new bills, including California’s SB 1162, have other compliance features. Businesses with over 100 employees have been required to complete pay data reporting each year for several years, however, SB 1162 increases the level of data reporting required. Data points now include mean hourly rates per race, ethnicity and gender, and employers must provide this data on their labor contractors in addition to their traditional headcount.

How This New Legislation Affects Employers

Most obviously, the new rules require employers to provide wage information for job postings, and some other reporting requirements may apply depending on your location. Employers will need to think about wage ranges in a new way — it’s no longer acceptable to base new hire wages on arbitrary numbers that may perpetuate internal bias or other hidden factors. Employers are being asked to plan ahead and evaluate early the value and function of a new position.

It’s important for employers to realize that the arms of this new legislation reach beyond the recruiting process and farther than the geographic area requiring the information on the posting. Job postings are typically visible to all, so the employer’s entire employee base will now have access to pay range information. What will the incumbents in a job role think if they see a wage range that is not congruent with their compensation? Many employers face the task of developing a strategy and compensation philosophy that responds to these new challenges.

What Employers May Want to Consider

Employers are, as always, in charge of their own destiny when it comes to planning for their business. Some may choose to respond to the minimal compliance obligation, while others see value in a deeper evaluative dive into the issue at hand. Below is a listing of some general levels of inquiry regarding employee compensation.

• Individual job role benchmarking/pay range development: This is clearly the first step in complying with the new rules. Employers must now understand the value and wage range of a position upon posting. Utilizing market wage data, the current competitive range for a position can be determined through comparison to incumbent wages as reported to various third-party salary surveys or publications.
• Individual employee compa ratio evaluation: This is the process of comparing an employee’s rate of pay to the average rate for the position (as determined by salary survey information). An employee with a compa ratio of 100% would have the same rate of pay as the average for the role. Of course, some employees may be above or below the actual median number, and that might be fine. Factors such as performance, tenure and developing skill sets can factor heavily into the correct placement of an incumbent’s rate. However, employers do need to be aware of these factors and ensure that any variances are based on valid criteria and not discriminative bias. Employers should be encouraged to view this data closely and take proactive measures to document or correct it.
• Company-wide salary benchmarking projects: As an extension of the individual compa ratio analysis, this process involves an in-depth analysis of each position in the organization. This holistic approach provides a clear picture of the status of compensation across the board for employees. It also helps employers identify any pockets of inequity within the company’s employee population.
• Salary banding review: Once the company has solid position benchmarking data and has reviewed their overall position to market regarding employee compensation, they may wish to create salary bands with standardized wage ranges. Jobs within these bands are considered to be comparable in job level, however they may vary in functional scope. This method allows the company to manage compensation for like-leveled positions as they move forward with compensation planning.
• Compensation philosophy development: It’s difficult to be strategic without having a strategy in the first place. The most effective employers realize that greater understanding of compensation factors and how they will consistently respond leads to more effective practices for attracting and retaining the best talent. Companies can choose if they prefer to lead or lag regarding wages; they can also create their employment policies and campaigns with this direction in mind. At this stage of the compensation review spectrum, organizations will have moved past the reactive phase of minimal salary review and toward achieving a new understanding of the details required to maximize the power of managing employment overhead and market strategy.

The Bottom Line

It's important to act quickly if you're an employer affected by the new transparency laws. You can implement the base requirements first to achieve regulatory compliance and then plan for a long-term talent strategy by doing a more holistic assessment of your compensation program.

Our experts are well-positioned to offer guidance for employee compensation at the individual to the strategic level. To learn more, visit our Business Outsourcing Services page.