New Research Suggests Companies Should Be Radically Transparent About Salaries

November 1, 2018

People are pretty obsessed with salaries. For one thing, salary surveys are some of our most popular posts on the Argentus blog. They’re also the biggest motivating factor for when job candidates strike out into the wilds to pursue new roles.

Salaries are the chief tool in a company’s toolbox when they’re trying to attract talent. Companies have long used other forms of compensation to attract candidates, and these alternatives have become more in vogue recently. But no matter how important work/life balance, work from home, office perks, and other lifestyle incentives become, money still talks.

And if employees start talking about their compensation with each-other, it can lead to workplace problems pretty quickly. It can bring to light issues of pay equity, which is a dark horse disruptor that stalks many HR departments at night. If employees’ relative salaries are out of whack with each-other and that info gets out – for example, a junior employee making more than a senior employee in the same role – it can challenge loyalties and seriously endanger a company’s culture.

Now, new research from economists for Harvard Business Review tries to arrive at concrete data about pay inequity’s impact on workplaces. What problems does it bode for productivity, and how can companies respond?

The study’s authors explored both “vertical” pay equity and “horizontal” pay equity. In other words, they looked at pay equity between bosses and employees, and pay equity between employees of similar seniority.

To study vertical pay equity – in other words, how knowledge of a boss’s salary impacts workers – the study’s authors asked employees to guess their managers’ salaries. They then revealed the manager’s actual salary to half the respondents. After this, they measured productivity in both the “in-the-know” group and the control group.

Some of the results:

  • On average, employees underestimate their managers’ salary by 14%.
  • People who discovered their boss’s salary was 10% higher than they thought, spent 1.5% more hours in the office, sent 1.3% more emails, and sold 1.1% more product. Interesting
  • The bigger the “surprise,” the bigger the effect on the employees’ productivity. Employees who found out their bosses make 50% more than they thought improved their productivity by five times as much by those same metrics.
  • Employees also became more optimistic about future earnings after finding out their managers’ salaries.
  • This suggests that openness about managers’ salary data could increase employees’ productivity. HBR speculates this comes from employee aspirations, which makes sense. If you find out your immediate supervisors are making more than you thought, you might be more inclined to chase that next promotion.
  • However, this trend only held when employees found out salary data about bosses a few rungs higher up the ladder. Finding out about C-suite compensation did little to spur productivity.

Even though it must be acknowledged there are probably better ways to measure productivity than the amount of emails you send and hours you spend in the office, the results are interesting indeed. On one level, they might be obvious (“finding out your boss makes more money than you thought might make you more productive? Shocking!”), but the data also offer an interesting take:

Secrecy might not be the best policy.

But when the researchers turned their attention to horizontal pay equity, the results got even more interesting. They asked employees to guess salaries for their peers. While they were closer than their guesses for managers’ salaries, they were still off. They then revealed the answers to half of the respondents and compared their productivity to the control group.

An employee who found out a peer makes 10% more than expected spent 9.4% less time in the office, sent 4.3% fewer emails, and sold 7.3% less.

In other words, their productivity tanked.

This research throws cold water on the idea that you can motivate employees through salary increases alone. If you reward a contributor with a higher salary – without a bump in title and responsibility – and that info gets out, it can measurably hurt the productivity of their group.

The authors drew some conclusions about salary transparency that challenge conventional wisdom – even if they acknowledge the data isn’t quite there yet. Most employees want transparency about salaries within their organizations, and most employers try to keep this info close to the vest. However, most employees – understandably – balked at the prospect of having their own salaries revealed.

The study’s authors suggest that employers can be more strategic about transparency, for example disclosing managers’ salaries in an attempt to boost productivity for sole contributors. They also suggest that employers get creative with salary disclosures – using anonymized or average salary data within the company to help motivate employees while allowing people to keep their own salary data to themselves.  

Whether this is an immediate tool in company toolboxes, or something coming down the pike, it seems to us that salary transparency might be another opportunity to boost trust, openness and productivity in the workplace. 

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