Is Open Salaries and Pay Transparency a Good Idea?

The ongoing calls for salary transparency as a cure for pay inequity are actually creating confusion among employers. Salary transparency is a double-edged sword; it could bring motivation and demotivation at the same time. A recent survey by HBR involving 2,060 employees suggests that employees are significantly motivated when they learn about their manager’s salaries, mostly if they are a few promotions away. Focusing on peers, the survey recorded massive demotivating effects of learning other’s salaries.

However, employees with very limited chance of making it to levels with fat salaries will resort to protest. A 2015 research from the Chartered Institute of Personnel and Development (CIPD) found that high pay levels for top CEOs are demotivating employees in the UK. Some 60 percent admitted that CEO pay levels in the UK are demotivating employees, while 71 percent admitted that CEO pay levels are just too high. Aside from negatively impacting on employees’ motivation, the pay disparity led to a sense of unfairness and protest by the employees.

This is why a transparent salary policy frightens most organizations. But just like everything else we can think of, workplace culture is rapidly changing. The negative effects of pay transparency could translate to hidden flaws in the existing management culture. Yes, salaries have always been a private business but the culture changes going on, primarily influenced by tech advancement, require more from employers. Employees and job applicants are now better informed.

salary transparency

The survey report: “Inequality at Work: The Effect of Peer Salaries on Job Satisfaction,” published in American Economic Review, found that employees who were not informed about the salaries of their peers showed more satisfaction than those with the knowledge of others’ salaries.

Demotivating effects of salary transparency

Employees who find out they are “underpaid” tend to develop more dissatisfaction with their employer and likely to leave: A 2012 survey by a team from the University of California, performed shortly the school began employee salary public, compares responses from employees that have learned about others’ salaries and those still ignorant. The survey report: “Inequality at Work: The Effect of Peer Salaries on Job Satisfaction,” published in American Economic Review, found that employees who were not informed about the salaries of their peers showed more satisfaction than those with the knowledge of others’ salaries. The latter employees also indicated more intent to depart than the former employees. In other words, salary transparency can incite dissatisfaction and turnover.

Employees constantly reminded of their perceived unfair rewards tend to reduce their productivity: It could be easier for employees to deal with “pay inequity” if they are not constantly reminded of it. Hence, pay transparency that loudly announces pay differences by constantly rubbing them off the face of the employees has a more negative effect. A recent research, which investigated the mechanisms that shape social comparison in organizations, led by Tomasz Obloj, an Associate professor of Strategy at HEC Paris suggests that pay transparency creates more negative emotions that dampen productivity because it gives room for constant comparison.

Employees could resort to protests for change when they learn about their peers’ high pay: Similar to the case between CEOs and their employees in the UK, Harvard University paid the price of losing many fund managers shortly after making its employee salaries public. Harvard was paying its fund managers employed by external investment management firms much higher and there was peace until it implemented salary transparency. Students, faculty, and alumni opposed the pay disparity, and all efforts by Harvard to justify these extra rewards fell on deaf ears. Hence, salary transparency could incite lobbying for change.

The big challenge

A review of all the responses from the employees points to one thing: how they rate themselves. In most work settings, it’s practically not easy to access individual performance, partly because our current management model look out for the overall productivity. This seems to give us wide latitude to exaggerate how much we contribute to the employer. More support to this is a survey by Todd Zenger, Professor at the University of Utah, published in HBR, asking some engineers from Silicon Valley companies to assess their performance relative to their peers. Only one person felt his/her performance was below average. Over 92 percent of the 700 surveyed employees felt were in 25 percent and almost 40 percent felt they were in the top 5 percent. With this bloated sense of self-worth, it is difficult for an employee receiving a lower pay relative to their peers to accept they are not underpaid.

These negative effects of pay transparency do not nullify the need for transparency in your work culture. It only calls for a more careful one. Implementing salary transparency requires employers to first understand what their employees want to know and proper fundamental knowledge of what to expect. What criteria do you use in creating employee compensation and benefits? Are your employees interested in learning what they could earn in their next two promotions? Transparency policies with negative impacts still constitute unclear information and may have failed to begin with the right fundamentals.

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