What do Oracle, GE, Sony, Whole Foods (now part of Amazon), and Buffer (a US social media management company) have in common? For one, in the US, they all practice pay transparency, which allows employee access to compensation information and discuss pay freely among peers. Although the notion of pay transparency appeared in literature as early as 1960s, it only has become a popular issue in recently years. For example, early this year over 200 employees from BBC publicly demanded a full pay transparency on individual salaries and benefits to reduce pay inequality. It is generally believed pay transparency will increase trust between employees and the firm, which lead to better job performance and reduce bias such as gender pay discrimination. It was also suggested the practice of transparency in workplace is preferred as millennials enter workforce.
Research tried to understand how pay transparency will impact organizations. Dr. Peter Bamberger from Tel Aviv University and Dr. Belogolovsky from Cornell University found out pay transparency provides signals (pay information) for employees to identify who is the expert for them to ask for help. A separate study by the same group of scholars found out pay transparency caused episodic envy and reduced helping behaviours among team members. Pay transparency was reported, using a database of the University of California employees, led to job and pay dissatisfaction and quit intention from employees who were paid below the median. Perhaps the more direct counter argument of pay transparency is: to many people pay information is a personal information and should be treated as confidential, disclosing personal pay information will be viewed as violation of privacy, regardless of the impact to overall organization. So here is the dilemma, people want to ‘see’ others so they can know if they are treated fairly but at the same time, they don’t want to be ‘seen’!
Should companies, especially technology companies that are accustomed to open culture, adopt pay transparency for better organizational performance? The answer is ‘it depends’. First of all, pay transparency is not ‘all-or-none’, pay transparency can be categorized into communications transparency which allows employees to freely discuss compensation, outcome transparency in which actual compensation level is disclosed and process transparency in which companies disclose the process of how compensation is determined. So, companies can decide if they want to practice full pay transparency or just some degree of transparency. Secondly, according to a research published last year, the preference of pay transparency from employees play a critical role in determining if pay transparency is favourable to the company’s performance. If employees prefer pay secrecy, then a pay transparency policy from the company will reduce job satisfaction and the perception of justice.
In short, misalignment between employee preference on pay transparency and the company pay policy, whether it is transparency or secrecy, will cause poor employment outcome. There is nothing new under the sun, if you want employees to engage and feel happy with the company, you need to know them well and respect their preferences. Pay transparency is a double-edge sword with some positive and negative effects to the organization; however, if you know how to use it well, it can be very powerful in improving organizational performance. If you are considering whether to adopt pay transparency, some of the questions you should consider for your company are: is there a good methodology in determining compensation, what is the culture of the company, what is the current pay structure strategy. There is no simple answer to whether or not to adopt pay transparency, but regardless of the decision, every firm should do the exercise of asking themselves whether pay transparency is good for them because sooner or later the employees will come ask this question and you better have an answer for them.