Salary transparency laws create unexpected challenges for small businesses

For the most part, salary transparency laws have become a beacon of hope for pay equity. But for small businesses, it's a double-edged sword that may stunt the retention and recruitment of talented workers.

There are currently 17 states in the U.S. that have laws around pay transparency, according to compensation management platform Pequity. And although more visibility around wages was and continues to be a much needed change, 16% of small businesses are already being impacted by the new legislation, according to recent findings from executive coaching organization Vistage, and it's presenting a challenge.  

"The same rules apply for both [large and small companies]," says Joe Galvin, chief research officer at Vistage. "But the transparency laws that come into play are directly a challenge for small and midsize businesses because they [depend] much more on competing and retaining talent." 

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Salary transparency removes the cloak of compensation, according to Galvin. Large companies may also be struggling under the weight of pay transparency laws, which require companies to disclose the salary range on all posted jobs including promotions and transfer opportunities. But the nature of the beast is much different. For larger organizations, who can typically pay more because of their size and revenue, pay transparency laws can help achieve pay equity, and help companies chip away at discrepancies in pay born out of oversight or even bias. 

Small businesses, given their size and limited resources, often do not have the budget to make any significant adjustments to their payroll. This means that should current or prospective employees feel unsatisfied with their pay or the listed salary on a job opening, small business owners will have to get creative with how they plan to keep employees happy with what they're making. 

"This forces small businesses to focus more on how they differentiate beyond [traditional] compensation," Galvin says. "The comparables become job and role, benefits, development, cultural fit and flexibility." 

Many small companies are already seeing the effect of that shift. In fact, in an attempt to offer more robust benefits, 91% of small business owners expect costs for employee healthcare to increase next year, according to Vistage. Eight percent are choosing the opposite, scaling down their current healthcare offering in order to potentially free up cash flow for employees looking to negotiate higher wages.

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"The competition now is around flexibility," says Galvin. "[Salary transparency laws] allow for the aggrandization of small businesses' benefits, of their work environment and of the actual trajectory and growth potential of the jobs themselves." 

To stay competitive, small businesses will have to adopt many of the same flexibility trends that larger enterprises had to embrace in the wake of the pandemic, including hybrid and remote work, adaptable hours and benefits that focus on the whole person such as better mental health support. 

"People will remain the most limited resource in organizations — both big and small," Galvin says. "The workplace will become the battleground. What can leaders do to create a stronger gravitational pull of the business to keep people and to attract people? Because the employee talent wars aren't going away."