With companies finding it harder to attract new hires, many employers are agreeing to pay astronomical salaries for hard-to-fill positions.

“Many company-recruiting efforts are resulting in massive wage gaps,” says Adriana Herrera, founder and CEO, PayDestiny, a software company that helps companies share salary ranges with employees. For instance, she says, it’s not uncommon for a new hire’s compensation to exceed the salary of their boss, who has been working for the company for several years, especially if the new hire is taking a position that has been difficult to fill.

“The combination of a tight labor market, raising minimum wages, employees seeking to reset their careers post-COVID, and high wage inflation are all forcing employers to make higher offers to bring in external talent,” says Ruth Thomas, a pay equity strategist at Payscale. “This is creating pay compression and is a threat to pay equity internally.”

For smaller businesses and high-growth startups especially, the lack of standardized compensation formulas upend the salary structure, Herrera says. Without a formula that calculates a salary based on years of experience, skills, and level of education, the employer and employee are negotiating based on the candidate’s perceived value, which can be skewed in a tight job market, she says.

Companies that are using large wage increases to lure job candidates may discover huge pay gaps in their salaries at the end of this year, Herrera says.

In addition, employers who are inflating wages for hard-to-fill positions, potentially may have to limit pay raises for existing employees, says Andrea Derler, principal of research and customer value at people analytics company Visier. “If you’re an employee within an organization and you see people coming in with higher wages or you suspect it, it will not sit well with you,” adds Thomas.

Most employees already suspect they aren’t paid a fair salary. Only 37% of employees believe they’re paid fairly by their employer and nearly half believe they could make more money right now simply by switching jobs, according to a new survey by Employ’s 2022 Job Seeker Nation Report.

THE PUSH FOR MORE PAY TRANSPARENCY

As companies have placed more emphasis on diversity, equity, and inclusion in the workplace, employees have begun to expect more transparency around pay, Derler says. Pay transparency is increasingly important to employees with 68% reporting they would switch jobs if their new employer offered greater pay transparency, even if their job responsibilities and salary remained the same, according to a Visier survey of 1,000 full-time, U.S.-based employees. For Gen Z employees, that number increases to 81%.

Meanwhile, 82% of workers wish that more employers would disclose wage and benefits information in job postings, according to Employ’s 2022 report. In addition, 74% of workers said they would feel more confident in negotiating their salary if the job description included the salary range for the position.

Investors are also putting increased pressure on companies to provide pay transparency. A Gartner analysis of S&P 500 earnings calls found that the frequency with which CEOs talk about issues of equity, fairness, and inclusion has increased by 658% since 2018. “There is a greater expectation from investors and shareholders about pay transparency, and they are starting to consider holding companies accountable about paying people fairly,” Thomas says.

Several states, including California, Connecticut, Maryland, and Rhode Island, have pay transparency laws that require companies to provide salary ranges at the candidate’s request. In Nevada, employers must provide salary ranges after the first interview; and in Colorado, salary ranges must be included in the job posting. In Cincinnati and Toledo, Ohio, salary ranges must be provided at the candidate’s request after the employer extends a job offer. Washington State will start requiring salary ranges in job postings in 2023.

However, a New York City law that would require any employer with four or more workers to post the minimum and maximum salary for each position by May 15 may be pushed back to November 1. The New York City Council Committee on Civil and Human Rights discussed an amendment that would exempt companies with fewer than 15 employees and exclude certain positions. The reason: Business owners pushed back on the New York City law because it would cause a disruption and make it harder to recruit, and it could make it harder to retain employees once salaries are posted, Herrera says. “Because of the momentum and traction wage equity had, it was pushed forward without much thought to how it would be implemented,” she adds.

HERE’S WHAT EMPLOYERS CAN DO

“Internally, there needs to be a shift in the way negotiation is encouraged and received,” says Lanaya Irvin, CEO of Coqual, a Manhattan-based nonprofit diversity think tank and corporate advisor on barriers to workplace advancement for underrepresented populations. Too often, employees think the only way to receive a meaningful pay increase is to change jobs, she says.

Companies need to commit to new pay transparency practices and rethink norms around negotiation and discretionary pay, finds a new Coqual report, Equity at Work: Fulfilling its Promise through Process. Conducting a pay equity analysis would help companies uncover and address pay disparity, and providing salary ranges and promotion criteria would signal to employees that the company is paying attention and tracking this information, Irvin says.

However, pay transparency goes beyond making sure women and men are paid equally for the same work. “If Bob makes more than Jane because he is better at his job, pay transparency would mandate that my boss have a conversation with me so I understand what I need to do to be as good as Bob at my job,” says Betsy Leatherman, global president consulting services at Leadership Circle, a leadership development firm.

Meanwhile, 66% of companies say they plan to do a pay equity analysis this year, according to a recently released study by Payscale. Yet, says PayDestiny’s Herrera, many CEOs fear that conducting a pay equity analysis could backfire if employees find out their newer colleagues are making substantially more money.

WHAT EMPLOYEES CAN DO

If you’re interviewing for a new job, ask the hiring manager about the salary range, how a compensation package is put together, whether the company uses standardized formulas to determine pay, if there is a salary matrix, and whether that matrix is applied to everyone holding the same role, Herrera says. This will give you a sense of that company’s policies on pay equity.

Never be afraid to ask what the wage range is for a job, even if you live in a state that doesn’t mandate pay equity, Thomas says. Ask your manager what the wage range is for your position and ask them to explain how your pay compares to others in a similar role, she advises.

Think twice about posting your salary on Twitter or LinkedIn. While the intention is to be helpful to others, posting your salary could impact your salary the next time you look for a job. While there are laws preventing employers from asking about current salary, if the information is publicly available, an employer can use it.

“If I was considering you for a job and I had valued you at a higher level [than the salary you posted], I might give that a second thought,” Leatherman says. “I might not think about you for that role, or I might drop down the salary if you’re hired.”