How would you feel if your colleagues knew your salary?

Does your company provide details on how much everyone in the organisation earns? At many organisations, talking about pay is taboo or even a disciplinary offence. Conversely, an Argentinian software company allows staff to set each other’s salaries.

Salary transparency is an approach to pay and compensation that is diametrically opposed to the long-held practice among most employers of keeping what the company pays to whom completely hidden. The only exceptions are compensation packages for senior executives of publicly listed companies, which must be disclosed in the published annual reports.

In the age of data, employees are increasingly likely to have information on average salaries through sites such as: 

Payscale Salary.com Indeed Glassdoor or Mercer’s Global Pay Summary, however, these typically show averages across multiple data points, which is often seen as too distant to ‘my own circumstances’.

The goal of open pay is to bring pay and performance issues to the surface for discussion, remove compensation disparities, and inspire improved performance. When pay is kept hidden, unpleasant surprises might occur, such as when an employee discovers by accident that they are earning less but are prohibited from discussing it because they are not supposed to know. 

Most employers keep pay secret because they believe employees discussing salaries will be disruptive. Kevin Hallock, Dean of Cornell SC Johnson College of Business opines that if a company can’t justify the way it pays people, then it is likely that: 

• Employees don’t understand how the business strategy fits with the compensation strategy;

• Business and/or compensation strategies are not being executed as planned; or

• Some of its people just aren’t on board

One of the most widely known examples of pay transparency is Whole Foods, the supermarket chain acquired by Amazon in 2017. Whole Foods CEO John Mackey is a flag bearer for the pro-pay transparency club. Mackey first started making compensation data available to all Whole Foods employees in 1986, just six years after co-founding the supermarket chain. Whole Foods now shares the average pay for professional titles throughout the organization on its website. Mackey believes a benefit of pay transparency is that, “it gives people something to strive for”. If employees can see the salary they could be earning in a more senior position, they will have greater motivation to work toward earning a promotion. Mackey also sees pay transparency as a way to help achieve pay equity, and highlight what the organisation most values and rewards.

Benefits of an open salary policy

Open salary policies have been shown to have big benefits for employees. Advantages include:

• Decreasing pay disparities: Salary transparency is thought to be one viable strategy to decrease wage discrepancies and ensure that all employees receive equal pay for equivalent work. Businesses can better attract top personnel and avoid discrimination complaints, while employees benefit from knowing that their gender or race has no bearing on their pay.

• Improving productivity: A 2013 study completed at the University of California-Berkeley showed that providing workers with information on how their income compares to others resulted in a productivity boost of as much as 10% of average output.

• Decreasing turnover: A survey of 71,000 companies by PayScale found that employees were more likely to think their salary was fair (and less likely to leave an organisation) if their company communicated clearly about salary. Pay transparency was found to be more important in influencing employee engagement and reducing employees' intent to leave than were typical employee-engagement metrics such as opportunities for advancement.

Downsides of an open salary policy

Companies contemplating an open salary policy also need to consider possible downsides, including:

• Reduced job satisfaction: While some research has shown an increase in job satisfaction and decrease in turnover due to pay transparency, other data suggest lower-paid workers experience lower morale, while there's no impact on those earning a median salary or higher. This same research, conducted in 2011, showed that workers with incomes below the median are more likely to look for a new position, while retention is neither increased nor decreased for those with earnings above the median.

• Could encourage dishonesty: In the research paper “Cheating More for Less: Upward Social Comparisons Motivate the Poorly Compensated to Cheat,” the authors gauged the effect of compensation awareness on cheating. They discovered that that lower-paid study participants were more likely to cheat on tasks if they were able to compare their earnings to higher-paid participants. For companies with transparent pay, that could mean disgruntled employees spend their workday job hunting, doing low-quality work, or lying about productivity.

• A lack of privacy: Some employees may be apprehensive about their wages being revealed to their colleagues, or a wider audience if the information is made public. Competitors could use publicly available compensation data to try to entice talent away.

In the Harvard Business Review Todd Zenger puts forward the case against pay transparency. He argues that unless performance is highly transparent, imposing transparency will elevate feelings of inequity that will inevitably push employees to depart, reduce effort, and lobby for change. He believes that unless you have a clean, clear, and broadly accepted measure of individual performance, transparency will likely push you to flatten pay — linking rewards to factors you can precisely measure, such as seniority or hierarchical position. Zenger states that widely publicising pay simply reminds the vast majority of employees, (nearly all of whom possess exaggerated self-perceptions of their performance), that their current pay is well below where they think it should be. Zenger’s evidence points to transparency elevating three costly outcomes:

• Employees who suddenly discover they are “underpaid” become more dissatisfied with their employer and more likely to depart.

• Employees reduce their productivity when consistently reminded of what they perceive as unfair rewards.

• Employees suddenly made aware of their peers’ high pay take up politicking for change.

A challenge of implementing pay transparency is having to explain differences among salaries to head off perceptions of unfairness. As much as every company might want to be a model of consistency and equality, the reality is that people’s salaries can vary. Recruiting an external candidate with a wealth of experience from diverse employers may often require a premium to lure them away from their existing employ. Learned best practice pan-industry could be perceived as more valuable than an employee who has been loyal to a company for years but lacks the know-how that might come from having diversified their experience with different employers. An employee with a higher salary may have a unique or in-demand skill, or maybe the higher earner is simply a more skilled and aggressive negotiator. 

There is ongoing discussion about whether more transparent salary information could help to reduce pay inequality such as gender pay gaps. In 2017, the UK mandated public disclosure of median and mean gender pay gaps across hourly and bonus pay for any entity with 250 or more employees. Unlike in other settings, gender pay gap data in the UK are prominently disclosed and saliently displayed. The British government requires firms to post a separate gender pay gap report on their websites – rather than allowing firms to bury these figures in their annual reports – and provides a searchable database of gender pay gap data on a government-hosted website, facilitating broad dissemination. 

You can read more about the The Impact of Mandatory Gender Pay Gap Disclosure in the UK on the Columbia Law School blog.