Employees Are More Motivated When Companies Are Transparent About Salary

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Photo: Lu Huanfeng/Getty Images/iStockphoto

Traditional etiquette dictates that you don’t talk about money in polite company — which, regardless of how you actually feel about your co-workers, generally includes the office. Of course, the taboo against sharing salary information in the workplace is often less about etiquette and more about protecting the company’s bottom line. As a former employer once told me when I asked for a raise to match my co-worker’s pay: “This is why I don’t like you talking to each other about how much you make.”

Which pretty much sums up the problem: When salaries are kept secret, unsavory employment practices — including gender discrimination — can flourish. Take, for instance, the recent Department of Labor lawsuit and investigation against Google, which alleges that “discrimination against women in Google is quite extreme, even in this industry.” According to the lawsuit, the company refused to disclose data about employee salary history.

On the bright side, though, some states have adopted new regulations to address the issue, urging companies to share how much their workers earn and how those wages are determined. New York’s transparency laws, for instance, specify that “no employer shall prohibit an employee from inquiring about, discussing, or disclosing the wages of such employee or other employee, except as otherwise provided herein.” And plenty of organizations have followed suit, encouraged both by these new regulations and by new research showing that pay transparency is good for them, too: In recent years, several different studies have found that making salary data publicly available can improve employee performance.

“At the individual level, pay secrecy can have a deleterious effect on employee motivation, task performance and retention,” said Elena Gitter, an ‎assistant professor at Cornell University’s School of Industrial and Labor Relations. Together with Peter Bamberger of Tel Aviv University, Gitter recently conducted a study that found a link between employee collaboration and pay transparency that suggested employees work together more effectively when pay is transparent. Specifically, the two researchers discovered that workers are better at asking for help from the right people when they know how much those people earn.

Gitter and Bamberger asked their study subjects to complete a series of anagram puzzles in exchange for cash prizes, explaining that each person would be assigned to a virtual team that included three other teammates. They would earn cash for each round, but their earnings would depend on their individual performance compared to their teammates, as well as how well they worked with those teammates. What the participants didn’t know is that the other three players on the team were actually in cahoots with the researchers as part of the experiment — during the task, subjects were allowed to email their teammates for help, but the answers they received were pre-scripted.

For the game itself, they split participants into two groups: a secrecy condition and a transparency condition. In the secrecy condition, the subjects saw only how much they would earn in that round. But in the transparency condition, they could also see how much they earned compared to other teammates. Gitter and Bamberger found that when pay information was available, the subjects were generally able to judge the skill level of each teammate and pick out the most qualified one to ask for assistance. When that information was secret, though, they weren’t nearly as good at determining which one to turn to for help.

“Our findings show that in the context of performance-based pay systems, pay secrecy may elicit cognitive shortcuts among members of newly formed, virtual work groups and — at least in the short-run — hinder accurate perceptions of others’ expertise,” Gitter said. In other words, salary information gave the workers a way to figure out how skilled their colleagues were, which in turn made it easier to know who would be most useful to them. This seems fairly obvious — it’s easy to assume that workers who are paid more are also more skilled — but that’s also kind of the point: Salary serves as a measure of expertise, and it’s helpful for workers to know who the experts are in the workplace.

That’s not the only way that salary transparency can boost performance: In another study, Emiliano Huet-Vaughn, an assistant professor of economics at Middlebury College, found that subjects worked harder and more productively when they were able to compare their own earnings with others’.

Huet-Vaughn had over 2,000 subjects complete paid data-entry tasks. Some participants received only their own pay information, while others were given information about how much their colleagues earned, too. The study reported that subjects in the second group worked harder and increased their performance during a second round of tasks. The study supports additional research from Gitter and Bamberger, which found that pay secrecy decreased employee performance and concluded that secrecy can “take a toll on the ability of the firm to retain its best performers.”

If the research is any indication, then, two things are true: One, pay transparency makes employees work harder, and two, pay secrecy leads to a decline in performance.

But transparency isn’t the solution to all problems, and there are other variables to consider when it comes to figuring out what’s in workers’ best interests. For example, Huet-Vaughn points out that because employees work harder just knowing how much their co-workers make, transparency could hypothetically replace more rewarding incentives, like bonuses or actual raises.

And transparency alone won’t solve pay discrimination. Gitter points out that the real issue is ultimately more about equality. After all, if workers aren’t paid fairly, transparency only reveals that unfairness. And it might even have an adverse effect on their productivity. “Pay transparency may increase feelings of inequity, thus jeopardizing productivity and the control of workforce costs,” she explains. “Therefore, the real issue is not whether the pay should be transparent or not, but rather whether the compensation system is well managed, equitable, consistent and well communicated.”

That said, Gitter also believes that some degree of transparency is necessary to convince employees that their company’s compensation system is indeed fair. Because “pay secrecy fosters discrimination,” she notes, “managers might consider adopting at least partial pay transparency policy with the broad parameters of compensation made more transparent.” It’s only one step in the right direction, but it’s an important one.

Salary Transparency Makes Employees More Motivated