Is Pay Transparency Good for Business?

Closing the wage gap was the focus of President Obama’s first bill into law when he took the office. The Lilly Ledbetter Fair Pay Act, passed on 29th January 2009, restored protection against wage discrimination by binding organizations with more than 100 employees to submit a pay breakdown by race, gender and ethnicity to Equal Employment Opportunity Commission (EEOC).

Pay transparency has become the latest weapon against unfair salary gaps. Why? Well a research conducted by Elena Belogolovsky of Cornell University and Peter Bamberger of Tel Aviv University suggests that pay transparency improves both output and effort especially in the case of high performers while pay secrecy may reduce employee performance.

The Design:

They studied 280 Israeli undergraduate students. In the study the subjects were paid a base salary for completing three rounds of a computer matching game with bonuses based on how well they played the game. Subjects played the game individually but they were also assigned to a four-person work group.

Following the “normal” trend in salary “pay secrecy” half of the participants were informed about only their own performance and bonus pay while the other half followed the “pay transparency” method and were given this information for the other three people in their work group as well. Members in every work group were given the opportunity to communicate with each other between rounds, but the pay secrecy group was restricted from discussing anything related to pay.

In addition, some students were given bonuses based on how many matches they made overall (absolute performance), while others were paid according to who had the most matches in the group (relative performance). When students in the pay secrecy group were also told that their pay was relative to the performance of others (whose performance and pay they couldn’t see), their performance was even worse. In addition, the high-performing participants were even more affected when they couldn’t see a clear link between pay and performance among their entire work group. So it’s clear that keeping pay secret is related to disengagement and decreased performance.

But does this mean that “Pay Transparency” actually increases performance?

In an experiment by Emiliano Huet-Vaughn, an assistant professor of economics at Middlebury to see if exposing people to information about their pay in relation to pay for others would trigger increases or decreases in the level of effort they put in work.

The Design:

He first recruited over 2,000 people through Amazon’s Mechanical Turk platform. Participants were asked to complete two rounds of a data entry task and were paid a piece rate for each correct entry. At the end of the first round, some of the participants were shown their earnings and also those of others performing the task, while others were given only their own earnings information.

In the second round of work, participants who were shown their earnings relative to others worked harder and significantly increased their performance. It is noteworthy that the performance gains were especially great among those who were ranked high after the first round of work. In other words, high performers worked harder to stay high performers.

It is not only performance, there are secondary benefits to pay transparency as well…

Other benefits to pay transparency:

1. More successful pay negotiations. Salary transparency helps expose pay gaps between otherwise similar workers, encouraging underpaid employees to renegotiate or move to better-fitting jobs, improving overall efficiency in labor markets. Men are more likely to negotiate salary than women. But studies show this “negotiation gap” disappears when information about other job applicants’ negotiation experience is public information.
2. More effective hiring.Studies find that better access to job information can encourage smarter job searching, help improve the quality of job matches, and may lead to shorter unemployment spells for workers. By providing more information to job seekers about job application processes, companies improve the diversity of applicant pools by boosting the number of female job applicants. Some economists argue that improved information can prevent workforce dropouts and “discouraged workers” in the same way that far more costly worker retraining programs can.

In short when people know where they stand and know what it will take to move up, they’re more motivated to work to improve both their performance and their standing – and that’s good business for everyone.

References:

Why Keeping Salaries a Secret May Hurt Your Company, David Burkus, published in Harvard business Review on 10th March, 2016.

3 Ways Salary Transparency Helps Business in Wake of Obama’s Effort to Close Pay Gaps, Dr. Andrew Chamberlain, published in Huffpost Business on 5th February, 2016.

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