Income process transparency means that people are given the information about how salaries are acquired. There are set income ranges for each position and it is made clear what it takes to get a promotion or a bonus. It is described in detail what is necessary for a person to do at every level.
There are other ways of making income transparent. Full-salary transparency means making public exactly how much everyone at the company earns. To us, process transparency is more valuable than full-salary transparency. It answers the question why people get paid what they get paid and, like Barrington said, ”even if you release every salary, you may not have answered that”. This way we let our employees know where they stand and how to reach that next step. It helps us in having overall more fair and open working place.
It can make people more productive
Keeping income secret leaves employees uncertain about the actual page range. Private pay can weaken employees perception that better performance is followed by increase in pay. Keeping income private is related to disengagement and reduced performance. People under more transparent pay provide significantly more work effort on average than those with no information about peer earnings.
Can help retain talent
Showing everyones income could help companies retain talent. Belogolovsky and Bamberger did an experiment with Israeli students who were paid a base salary to play a computer game. Part of the participants received only the information about bonus pay and they were requested not to discuss any pay-related issues during the experiment. The other part received information about their bonus pay and about the bonus pay of their fellow group members. It showed that people who are high-performers are more sensitive than others when they don’t see a link between performance and pay.
Connecting performance to productivity could lead high performing individuals to be more satisfied with work while demotivating average and low performing individuals. When auto glass installation chain transitioned from a fixed-rate hourly pay to a piece-rate plan workers in the high output category resigned 16% less than before the piece-rate plan while the employees with the normal output resigned 15% more than before.
Pay dispersion is a concept that describes when an employer pays different amount of pay to their employees for the same skills and the same type of work. Sometimes pay disparity can lead to resentment, lack of cooperation, sabotage, and lack of team potency. But pay dispersion is not related to quit patterns by itself. The way income increases were communicated to the employees and if the emphasis was given to performance or seniority had a great impact on their intention to continue working. Making pay increases based on performance and communicating it to the employees helps retain talent. If the pay is communicated well but based on seniority this could make average employees more inclined to leave.
Some workplaces tried giving their employees information about their relative income. This meant that they could see how much they earn in relation to others.
Sharing information about workers’ pay relative to others can significantly boost work effort, even after controlling for the effect of individual pay. Clark, Masclet and Villeval found that sharing workplace information led to much higher work effort. In their study there were 5 salary ranks and with each one-unit change in salary rank the jump in employee effort was equivalent to giving them a 33 percent pay increase.
Vidal and Nossol emphasise that giving workers information about relative position can lead to a great increase in productivity that is long-lasting and costless to the firm. When looking at companies that switched from a policy of pay secrecy to one of open compensation they found the average increase in productivity to be 7%. They attributed this to pure contest for relative position which happens when people derive value from outperforming others. They call this a Tournament without prizes. They also mention that workers started being more productive as soon as they were told that their work is going to be observed for the research, even before the first information about the performance and pay. This could mean that they were more productive, in part, just because they knew their productiveness is being assessed.
It is important to mention that by giving them just the information about their relative position in the company could quickly turn to a rat race, as they are not focused on their work and growth but on being better than their peers. This could be bad for company morale, encourage people to play against each other and create an overall stressful environment. By avoiding relative distributions, income increase for one person doesn’t not mean a decrease in rang for another and leads to a more friendly environment.
Improve employee satisfaction
If the pay is given as fairly as possible by making it public we could anticipate people feeling calmer about their earnings. So if you think you have a good pay systematisation in your company, making income public would show the employees that they are rewarded and treated based on their hard work leaving them to feel satisfied with their position or motivated to achieve more.
PayScale made a research by giving a survey to 71 000 employees and studied the relationship between pay and employee engagement. They found that the main predictor of employees’ satisfaction is whether they feel they are paid fairly. Even the satisfaction of underpaid workers increased from 40 to 82 percent when employer communicated the reasons for a smaller paycheck.
When employees don’t know what others are earning, they tend to overestimate their coworkers’ pay. This leads to them being less satisfied when guessing others income than if they actually knew how much it was.
It is more fair to the employees
Image two candidates that got the same level job. The first one agreed on the suggested salary of 50 000 while the second one negotiated more and got a salary of 60 000. To motivate their extra work they are offered a 10 000 bonus. If the first employee gives his best work, he will earn the bonus of 10 000 and, in sum, he will get the same paycheck as the first employee who didn’t go the extra mile to earn a bonus. This is clearly not fair and values negotiating abilities more than the work ethic.
Public disclosure of politicians’ income is associated with lower perceived corruption and better government. Countries that are richer, more democratic, and have free press have more disclosure. After all, it could be argued, that transparency is an important part of a well functioning organisation.
The biggest fear for some companies is that employees could gather information enabling them to make social comparisons within their job class. This could lead to them feeling resentful if they perceive their pay as being less that average for the same job. Second, the use of raises based on performance could lead lower-performing employees to seek employment elsewhere. Which for some, may not be a bad thing.
Having the pay differences out there puts people in a position to evaluate the fairness of their pay and enables them to stand up for themselves and ask for more if the coworker doing the same job is earning a higher pay. A female coworker might be shock to see that her male partner is earning 20 percent more for the same work even when they have the same qualifications. This can motivate her to stand up for herself and ask for a raise. Excess to others income can encourage underpaid employees to renegotiate or move to a job that fits them better. This leads to more efficient labor markets. Hofler and Murphy calculated that if the job information was available to workers the wages in the 1990 would be roughly 10 percent higher.
Could help improve the quality of job matches and interview-to-hire ratio
Workers searching for a job are unlikely to be fully informed about job characteristics, and it can be very time consuming for the firm to exhaustively screen and negotiate with all the applicants. Putting the job information on the internet can improve worker-firm communication and shorten the unemployment spells. Choosing to ignore talking about a candidates salary until late in the hiring process can lead to a lower interview to hire ratio. Employers don’t want to get stuck with the candidates who are motivated only by money, but still, salary is an important component to a job offer and eliminating candidates that don’t agree with the salary proposition early on can save valuable time, companies, as well as theirs.
More disclosure should also lead to more accountability, where companies and government are found responsible for ensuring the fair pay and satisfaction of their employees. This happened in some cities when, after disclosure of city managers excessive salary and peoples outburst, the council was looking to pay every new city manager less than the previous city manager.
Income transparency is the a considerable protection against gender bias, racial bias or orientation bias. Providing more job transparency can improved the gender balance of applicant pools by encouraging more female job applicants. Moreover online sharing of company interview experiences and incomes can help weaken gender differences in pay bargaining. It was observed women are much less likely to negotiate with employers over salaries than men but when researchers explicitly told all job seekers that pay was negotiable, this gender gap completely disappeared. Before the internet information about labor markets wash shared among friends and family. Since disadvantaging low-income and minority households more often than others lack informal professional networks they were in disadvantage.
It gets people moving 🙂
More transparency can improve relocation decisions. Is makes it easier for people to plan their careers away from home. Tara states that better information about salaries promotes movement to areas with the strongest job markets and can help people in finding the best opportunities for advancement in their salaries or careers. Knowing the page ranges can help people decide will the potential pay be high enough for the costs of living in the same place or for their ambitions. Different online sites allow job seekers to quickly identify job opportunities around the world. An example of this is paysa.com that enables people to search different job posting around across the US.
But, be careful!
It needs to be done right
There is one important aspect of wage distribution to keep in mind. To achieve income transparency and its influence on work effort a company needs to perfect their compensation schemes and needs to have a clear salary policy. Inequality in pay, subjectively assessed performance badly communicated pay policy will lead to dissatisfied workers. Even after taking all of that into account, if the employees simply aren’t ready to have that information shared, opening up can cause real problems.
Tim Low, vice president of PayScale said that salary is an emotional topic for most people and it can cause chaos if it’s suddenly thrown into the light without clear policies around it.
In some cases, how people perceive what they are being paid is more important that what they are actually paid. Making salaries public levels their perception with reality. Depending on companies internal consistency, if the managing of incentives and sorting performance parameters are well done income transparency can boost task commitment, facilitating the retention of strong performers and contribute to employee trust in management and satisfaction in general.
”We want to have a high-trust organization. We want people to feel like a community, to be treated fairly and feel good about their work and pay. Creating an open range salary system with detailed requirements makes it easier for the to see how their current position is connected to their income and what they can do to grow and reach the new step” – StuntCoders
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