Companies are facing a crescendo of calls for greater pay transparency as local, regional, and national governments around the world enact laws designed to increase visibility into pay practices. . These changes have already forced companies to abandon unfair, discriminatory compensation policies, but beyond this important and clearly desired outcome, the influence of payment transparency is more difficult to assess. Empirical studies suggest that payment transparency can lower overall payments, even as it removes inequities. It can also in some circumstances compromise employee productivity and affect companies’ ability to attract and retain high performers. Perhaps more dangerously, it pushes employees to favor a certain aspect of performance over others, which undermines the performance of the organization as a whole. Therefore, how transparency is implemented, is important to ensure that the organization and its employees benefit from it.
Although payment secrecy remains informal practice or formal policy for almost all employees in the US, companies are facing a crescendo of calls for greater salary transparency. Local, regional, and national governments around the world are implementing laws designed to increase the visibility of payment methods.
These laws range from requirements to report aggregated salary statistics by gender to laws requiring wholesale disclosure of individual salaries or even tax returns. Beginning November 1, 2022, New York City joined a growing list of city and state governments now required to post “good faith” salary ranges with all new job postings. Meanwhile, a number of websites, such as Glassdoor.com, Payscale.com, and Salary.com, as well as local employee efforts compiled into simple spreadsheets, provide more open access to information. to pay the employer. With the development of such salary transparency, the remaining rules and policies regarding payment secrecy have lost their teeth.
But is this transparency a good thing? Does it produce good results for individuals and organizations? A wave of recent academic studies has begun to provide important – but often complicated – answers. Here’s how salary transparency affects different job dimensions.
On the positive side, pay transparency is reducing wage inequities across gender, ethnicity, sexual orientation, and other dimensions. What we have just published study in Nature Human Behavior, for example, found that the rapid spread of pay transparency to US public academic institutions has significantly reduced the gender pay gap, even eliminating it in some states , and often cause academic institutions to more consistently or equitably link pay to observable measures of academic productivity. Study others settings report a similar reduction in the gender pay gap in response to pay transparency.
Beyond this important and clearly desirable result, the influence of payment transparency is more difficult to assess. Another empirical study suggests that pay transparency, including the form of transparency required by New York City’s recent law, actually lowers overall wages for a broader population of employees, even as it raises wages for unequal pay. The underlying reason is that, by publicly disclosing current salary ranges or salaries, employers are more likely to commit not to negotiate with prospective or current employees. They can now claim that any individual negotiation in which they engage must be negotiated with all (or many) others. In other words, this form of salary transparency, even if it reveals the employer’s expected salary, may lower the relative bargaining power of employees.
Our study in Nature Human Behavior also suggests that while pay transparency leads to fairer pay — pay that is more often linked to employee performance — it also results in pay that is flatter, more equitable, and less performance-based. base. This weak relationship between pay and performance can lead to low employee productivity – an outcome that seems to depend on what pay transparency reveals (and to whom). In another study, we found that if pay transparency reveals to employees that their company is fair and consistent in how it allocates pay to performance, then the overall response to employee productivity is positive. However, when pay transparency reveals that it has unequally allocated wages – for example, through discrimination based on gender – overall productivity declines.
Individual productivity responses also vary in predictable ways, based on what pay transparency individuals are exposed to and how they are treated individually. For example, if pay transparency reveals to an employee that they are underpaid, they may be less productive. If pay transparency reveals unfair overpayment (ie, an employee is earning more than they’re worth), that employee’s productivity is pretty impressive. The motivation of the latter employee is to justify their high salary to others, or perhaps shows a knowledge that with pay transparency, the only path to further salary increases is to dramatically improve performance.
Payment transparency also shapes turnover patterns. When employers compress or flatten pay in response to pay transparency, lowering pay based on performance, top performers are more likely to leave, as they seek organizations that are more willing to reward them. their higher performance (and perhaps keep their higher salaries more secret). Thus, it seems that the presence – in the same geographical location and industry – of both secret and transparent organizations can generate significant changes in the labor market.
There is one final factor to consider. As discussed, pay transparency pushes organizations to be more consistent in rewarding perceived performance measures. But what if the easily observed performance measures do not capture the essential elements of the job, such as cooperation, helpfulness, mentoring, or helping others? In these cases, transparency pushes individuals to increase their focus on performance metrics that pay transparency reveals in the form of salary.
A new pay transparency study Examines what happens when National Hockey League player salaries suddenly become transparent. This salary transparency clearly reveals to players that hockey salaries are largely determined by offensive performance metrics (goals and assists) with much less emphasis placed on defensive effectiveness – a dimension of performance that is more difficult to measure, but of almost equal importance. When the payment and its basis became transparent, the players responded predictably to the incentives it revealed: They increased the goals and assists, but now neglected the defense, and the overall performance of the player in the league decreased.
. . .
Given these findings, we submit that payment transparency should be viewed as a tool for change, but perhaps not an end in itself. A powerful positive change brought about by this tool is more equitable pay. But the influence of pay transparency on other outcomes such as total pay, employee turnover, and employee productivity is more complex and nuanced. In these dimensions, employers and employees alike must understand its influence and choose the type of transparency that will produce the results they are looking for.
However, for companies that have any choice in the type of pay transparency they adopt, those responsible must make any corrections necessary to establish fair, non-discriminatory pay, and then probably provide at least enough transparency to allow employees to verify this. Whether companies like it or not, the days of keeping a full salary are numbered.