Pay transparency laws undoubtedly have noble intentions, with advocates arguing that they’re a crucial tool in support of pay equality. In many ways, this is not new, however, with bigger firms often using aggregated data to get a sense of the going rate for talent in a practice known as salary benchmarking.

A recent study from Berkeley Haas explores the impact salary benchmarking has on workers. The study found that benchmarking may result in some pay going up and some going down, on average it tends to balance itself out as salaries coalesce around the benchmark.

“If there was a negative effect on salaries, it would be suggestive of anti-competitive effects,” the researchers explain. “That’s not what we found. If anything, we see some small salary gains for low-skill occupations.”

Widespread practice

The study found that nearly 90% of medium and large businesses in the US use salary benchmarking. The researchers analyzed new recruits at around 600 firms that had been using a benchmarking tool for over three years.

The new hires were split into two groups, with over 5,000 working for companies where the benchmarking data had been used prior to their hiring, and a control group of around 40,000 hires where the data was not consulted. The pay for each group was then compared for the five quarters prior to the benchmarking data being used and for the five quarters afterward. They also analyzed salary data from comparable hires at comparable companies over the same period.

The results show that there is a general trend towards the benchmark, meaning that high salaries fell and low salaries rose. Indeed, among the positions where salary data were compared, the salary of the new hire fell from about 20% before accessing the data to around 15% after. This corresponds to a fall of around 25%.

“The effects on salary compression coincide precisely with the timing of access to the benchmark: The compression was stable in the quarters before the firm gained access to the tool, dropped sharply in the quarter after the firm gained access, and remained stable at the lower level afterward,” the researchers explain.

Most affected

The effect was especially pronounced among low-skill positions that don’t require more than a high school degree. In such positions, the dispersion around the benchmark fell by around 40% compared to under 15% for more highly skilled roles.

“This finding is largely consistent with the anecdotal accounts in interviews with compensation managers, according to which low-skill positions are treated as commodities and thus should be paid the market rate,” the authors explain.

What’s more, they also found that benchmarking doesn’t appear to negatively impact the average salary. If anything, the impact is positive, albeit by a statistically insignificant amount. The biggest boost was among low-skilled employees, with this advantage also seen in terms of their retention, which rose by nearly 7%.

“This evidence suggests that firms may be using salary benchmarking to raise some salaries in an effort to improve, among other things, the retention of their employees,” the authors explain.

This is because low-skilled workers are often not given the opportunity to negotiate and instead are given take-it-or-leave-it offers. As a result, benchmarking was more likely to result in gains for them.