With recent implementations of salary transparency requirements for businesses by state and city governments coming to fruition this year, finance executives must be aware of the new regulations.  These new rules may revolutionize both compensation determination and the entire business hiring process.

More than half of executives said their companies had plans to disclose pay rate information last September. So, forward-thinking finance executives should have salary transparency requirement adherence top-of-mind when evaluating labor costs and headcount reduction plans in 2023.

Things like finance’s collaboration with human resources (HR), conducting consistent internal pay audits, and adopting the correct hiring philosophies and strategies in a digitized labor market will pay major dividends for organizations that are looking to fairly compensate the best talent.

Reconstruction of the Recruitment Process

Jesse Meschuk, senior adviser at Exequity and an expert on compensation and HR, gave CFO an exclusive take on how corporate finance should prepare to compete in the modern labor market. According to him, a sound understanding of how to add layers to an application process is a great filter for the salary-driven, under-qualified applicant that wastes both company time and resources.

“A properly structured applicant process can help to ensure only qualified applicants make it to the review stage by recruiters and hiring managers,” said Meschuk. “Companies, hiring managers, and recruiting teams can put in place pre-screening questions that help to determine candidates' qualifications, such as their experience [and] education. [They can even test their capabilities.” 

  Jesse Meschuk

The best companies have the infrastructure in place to make the hiring process smooth and efficient, said Meschuk. “The best-in-class companies put in place strong sourcing teams and candidate relationship management efforts,” he said. 

Focusing resources on proactive recruitment is a great way for an organization to be able to quickly fill positions with the best talent available, advised the executive consultant. “[The best] teams already know the requirements and qualifications, and proactively build a pipeline of qualified candidates. Once the position need is identified, they already have a list ready for the hiring managers to review." Organizations such as these "don't focus on 'post and pray' methodologies — they are already aware of who is in the market and who they would like to hire when the business requirements are identified,” said Meschuk.

Authenticity and Confidence in Communications

Kurtis Hanni, CFO of Cowan Group Engineering and creator of the podcast/newsletter Frameworks and Finance, shared his thoughts about the affect pay transparency has on the salary negotiation — from both sides of the interview process. According to him, communication about salary is about authenticity and confidence for both sides.

"As an interviewee, it's important to be upfront with what you need,” said Hanni. “By showing a lack of confidence in discussing your compensation [needs], you give the impression you hold a weak position. When someone comes in and can confidently tell me what they need, an offer would likely reflect that request, as long as they're [within] the range.”

  Kurtis Hanni

Just like Meschuk, Hanni reiterated that proactive recruiting is key to seeking out the best lower-to-mid-level talent. “For entry-level positions, businesses should do the research before posting the job,” he said. “While smaller businesses might have wider [pay] ranges, based on a wider range of potential job duties, the employer should attempt to restrict the range as much as possible.”

Hanni advised CFOs and their HR teams to avoid using salary transparency as a way to save on compensation through use of the lowest salary ranges possible in job posts. Offers with low salaries can cost companies even more money than if the company were to fairly compensate in the first place.

“I've found that lowball offers tend to result in higher employee turnover, at times seeing [newly hired] employees not even stop their job search,” he continued. “Turnover is extremely expensive, so it's important to make the right offer the first time.” 

According to Hanni, negotiations about a potential hire's salary usually don't slow up or halt the hiring process. “In all the hiring I've done, the ultimate decision has never come down to a salary request from an interviewee.”

Little Effect on C-Level Compensation

Equity and bonuses weigh heavily in compensation packages the higher one travels up the corporate ladder. So, salary transparency for executive positions has a different impact than it does on positions that are purely dollar-value compensation based. “It's unlikely that salary transparency will have a significant effect, therefore, on how [executive] roles are paid,” said Meschuk. “Or how companies tend to approach determining pay packages, as they can be developed on a case-by-case basis.”

I've found that lowball offers tend to result in higher employee turnover, at times seeing [recently hired] employees not even stop their job search. — Kurtis Hanni, CFO of Cowan Group Engineering

“Senior executive compensation packages tend to be highly customized and variable depending on the industry, the company size, the scope of the role, the executive's compensation package from their prior employer, and the company's approach to executive compensation,” Meschuk continued. 

Salary transparency is already a major factor in executive compensation at the largest public companies. SEC requirements force companies to have public compensation policies for those individuals.

On top of legally required salary transparency, Meshuck believes that salary transparency in the executive space won't have the same effects as it will in other areas. “There isn't really a strong need to post additional ranges for other elements of compensation, such as equity, and doing so may actually limit flexibility for the company and the executive, as each situation is customized.” 

Using Pay Audits

When asked about the use of pay audits, Meschuk said that conducting a corporate pay audit in order to gauge compensation across a mid-size or a large company is a great way for an organization to "arm" itself with leverageable data. Pay audits, which require a finance team's collaboration with HR, can pay major dividends for a company that is unsure about its employee compensation in comparison to the market.

There isn't really a strong need to post additional ranges for other elements of compensation, such as equity, and doing so may actually limit flexibility for the company and the executive. — Jesse Meschuk, senior advisor at Exequity

"For the market comparison, the compensation and HR teams can purchase access to compensation surveys, in exchange for participating in the survey," he said. "For the internal comparison, it can be helpful for the HR team to work closely with legal and an independent pay equity analysis vendor to do the right kind of statistical analysis to determine where inequities may exist, and therefore, where changes should be made."

On top of these kinds of internal audits, Hanni advised finance and HR teams to further their exploration of technology. According to him, some of the social issues within labor markets can be remedied by the combination of regulations like pay transparency and readily available technology.

"With the technology solutions available today, it has become even more important for companies to re-examine their policies," said Hanni. "There needs to be a serious discussion around creating new norms that better align with today's societal values."