A recent Workopolis article is one of many that argues the case for full transparency in compensation. The basic rationale is that full salary transparency can increase loyalty, improve productivity, and boost bottom lines.

But two questions remain: What exactly does one mean by transparency? And how transparent should you be?

There is a common misconception in discussions around transparency that all employees should know what others earn. This is unquestionably the wrong thing to do, as a person’s salary should be kept private. However, transparency around an individual’s own compensation – including salary, bonuses and benefits – and how that might change based on specific criteria, is critical.

Organizations should be transparent about how they make compensation decisions, including salary ranges. But a critical, yet often overlooked aspect, is transparency around their methodology and who is involved in making the decisions. This is particularly important, as it not only instils respect for the employer, it helps employees judge the fairness of their own pay.

If an employee understands how salary decisions are made, and accepts the fairness of that methodology, they are more likely to accept that their compensation is equitable, rather than thinking decisions are arbitrary and biased. It stands to reason that when employees believe they are unfairly paid, performance can suffer, and they may end up looking for alternate employment.

Bonuses are also part of the transparency equation. In cases where bonuses are based on corporate performance, the company should provide regular (i.e. quarterly) updates on how the company is doing, relative to their goals. For example, if bonuses are paid out only if the company reaches a certain revenue or profit threshold, regular updates should include a statement of where the company stands in relation to that goal. This does not mean disclosing all financial data – only enough to keep employees informed and engaged.

Conversely if bonuses are based on individual performance, employees should be updated regularly on how they are tracking against it, and more importantly, what they need to do to earn their bonus. Otherwise, achieving their results will be, at best, hit or miss, and there will be no behaviour change.

Organizations looking to benchmark their transparency practices can start by ensuring they have a defensible compensation program.  An assessment will reveal if they have a good program with a clear methodology, or have a tendency to make arbitrary pay decisions. Once a defensible methodology is in place, the next step is educating employees about the compensation program and its processes.

Being transparent in compensation matters is key to a productive workplace. However, simply disclosing compensation numbers without explaining to employees what it means to them will not achieve the goals employers are seeking. Transparency has to be done properly, always keeping the employees’ needs in mind.