Half of employees do not understand where their pay comes from – and that is a leadership problem, not an HR problem

THESIS: Lack of pay transparency is not a communication gap. It is a management gap. An organization whose employees do not understand the rules of pay loses control over trust, retention and cost predictability.

48% is not a communication result. It is a management signal

It is easy to treat pay transparency as something HR should “take care of”. But that is too narrow a view. When more than half of the team does not understand why they earn what they earn, the organization loses something much more important than good communication. It loses predictability. And predictability of costs and employee behaviour is a leadership issue, not just an HR task.

Pay transparency is no longer an organizational choice. It is becoming a condition for running a stable business. In an environment full of gaps and unclear rules, every employee creates their own version of reality. And, as organisational psychology shows, people often assume the worst: favouritism, unfairness, randomness. These assumptions become their truth, no matter how far the company’s actual intentions may be.

What transparency really means

Transparency does not mean publishing everyone’s salary. It means understanding the system's logic: clear criteria for pay rises, clear bonus rules, predictable promotion paths, salary ranges, and accountability for pay decisions. Employees are not asking for mechanical equality. They are asking for a rational system. They want to know that rules exist and apply to everyone equally.

When this logic is missing, employees start filling in the gaps themselves. They compare themselves with others, interpret individual decisions and increasingly assume that the system is unfair. This is where trust starts to decline. Often, the company only sees the problem when a good specialist resigns, and the leadership team hears about an issue that had been building for months for the first time.

Three business consequences

When employees do not understand the pay system, the company starts paying for it in several areas:

1. Turnover and its cost – replacing an employee costs at least 20% of their annual salary, and fully onboarding a new person takes 3 to 6 months. 
2. Lower engagement – an employee who feels undervalued usually stops trying as hard long before they start looking for a new job. 
3. Regulatory risk – linked to the EU Directive 2023/970, which requires employers to justify pay differences and shifts the burden of proof onto employers. 

Each of these consequences has a direct impact on financial performance. So the right question is not: “Can we afford transparency?” The real question is: “How much is the lack of transparency already costing us?” And that is a question for the leadership team, not only for HR.

Where to start. And why it pays off

The EU Directive can be treated as another compliance obligation to tick off. But it can also be used as a reason to organize the pay system before the regulator, the market or employees force the company to do it. The first path primarily creates a compliance cost. The second turns the same effort into an advantage: lower turnover, lower risk and a more predictable payroll budget.

WHAT THIS MEANS FOR YOUR ROLE

HR: diagnose where to start organizing the system: criteria → processes → communication → trust measurement.

Comp&Ben: the system may exist on paper; check whether it is understandable and defensible in practice.

Leadership team: this is a cost and risk issue, not a “soft” topic. Put it on the strategic agenda.

A company may have a pay system, but if employees do not understand it, the system is not working as it should.