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Why Companies Must Embrace Pay Transparency

Secrecy is detrimental for both productivity and retention rate

13Nov

As office conversation topics go, bringing up the issue of salary tends to go down about as well as ranking your favorite genocidal dictators. The majority of people consider their salary to be off the table in polite society, and even those for whom it isn't taboo will usually find that their employers do all they can to prevent it being shared.

The perceived wisdom is that if everybody knew their colleagues' salaries, chaos would ensue - leadership would be inundated with raise demands, arguments would break out, and disgruntled employees would stream towards the exits. Susan Brennan, Associate Vice President of University Career Services at Bentley University in Waltham, Massachusetts, believes that 'Sharing salary information can create tension between colleagues and resentment toward management — so it can really lead to a toxic work environment.' John Malloy, president of executive search firm Sanford Rose Associates in Santee, South Carolina, agrees, arguing that no good can come from pay transparency. 'It doesn't do anybody any good to share that information,' he says. 'All that can happen is potential jealousies.'

There is, however, a growing body of evidence that suggests this Henny Penny, sky is falling, rhetoric is entirely misplaced. Several studies have been carried out in recent years, the findings of which seem to suggest that pay transparency is actually far preferable to pay secrecy.

Pay transparency has two primary benefits. Firstly, it keeps employees happy. In a 2015 PayScale survey of 71,000 US employees, two-thirds of those paid the market rate for their position felt that they were being underpaid. Of these, 60% reported low job satisfaction and said they plan to look for a new job within six months. However, at companies that paid below-market wages, if employees knew why they were paid less than they could probably earn elsewhere, 82% said they were 'satisfied' with their jobs and had no plans to leave. Similar findings were reported in Glassdoor’s global salary transparency survey, with 70% of the 8,254 employees surveyed across Canada, Switzerland, Germany, France, the Netherlands, the UK and the US saying they believe that salary transparency has a positive impact on their job satisfaction.

The second benefit is that it makes employees more productive. David Burkus, an Associate Professor of Management at Oral Roberts University, noted in an interview with Harvard Business Review that, 'The research shows that when people know how they’re being paid and how that compares to their peers, then they’re more likely to work to move up it. And even those high performers are more likely to work hard to stay high performers in order to demonstrate why they bring that much value to the organization.' This was further evidenced in research by Cornell University and Tel Aviv University. In the study, researchers paid 280 participants a basic salary to finish three rounds of a computer game, with bonuses paid according to their efficiency. Each student was put in a four people workgroup but games were played individually. Everyone was allowed to communicate with one another between rounds, but those in groups where pay was kept secret were restricted from discussing anything related to pay. Researchers found that there was a direct link with pay secrecy and decreased performance, while results were even worse in the groups where students were told that their salary was relative to the performance of other participants, which they could not see.

There have been companies that have embraced pay transparency in the past. Wholefoods, for example, has been making everyone's salary public since the 1980s. But this trickle is growing into a stream, particularly at tech companies where transparency is at the heart of their philosophy. At tech startup Buffer, for instance, all wages are now available in a spreadsheet. Even as the company scaled from 10 employees to 65, they retained this transparency, coming up with a simple formula to ensure that staff understand why discrepancies exist. CEO Joel Gascoigne explains that the biggest challenge was overcoming the initial doubts, but once they did it was more than worthwhile. 'Someone felt that if their friends and family knew their salary, it might change the relationship they have with them,' he said. 'In the end, an overwhelming result we found was that a lot of these kinds of fears showed themselves much less than expected in reality.'

The key to implementing a successful transparency program is understanding why everyone is on different money. Payscale's survey showed only that people were happier when they knew why others were paid more, not just that they were. It's very rare that you will ever have two co-workers who have identical responsibilities and level of experience, and team members who don’t have access to the big picture will become disgruntled and feel undervalued, so you need to provide them with as much information as possible around this big picture. Buffer's team made sure to have frank conversations about how much different people's salaries should be and why. They also developed a simple formula for working out pay, which makes it easier for everyone to understand what they will be paid relative to everyone else from the very start. This is outlined on their website .

Ultimately, it boils down to a simple fact of life. Secrecy breeds paranoia. If something is left to your imagination, it will usually end up that you feel like co-workers are making more money and you are being discriminated against somehow or treated unfairly. This is particularly true when it comes to solving the issue of the gender pay gap. Given the wealth of research that exists showing women are paid significantly less across all industries, they will justifiably assume that a man in the same role they are in is making more as chances are, they will be. If they can see that they are on the same money, or can get a satisfying explanation as to why, that paranoia goes away.

This is all something that organizations have to embrace as it is in their best interests. The real main reason that companies want to keep pay a secret is not that it prevents discord, it is that it creates an information imbalance in their favor that gives them the upper hand in pay negotiations. It is up to companies to decide whether the loss in productivity and the hit to retention rate is worth this, because, at the majority of organizations, it isn't.

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