Should managers tell employees what their peers earn?

16 April 2018 -

Growing evidence suggests pay transparency within organisations can motivate employees

The latest gender pay gap data from the UK’s biggest companies may have put the spotlight on equality in the workplace, but many commentators are suggesting businesses should go further still.

With UK productivity still lagging behind European competitors, the question is whether full pay transparency across all levels would give employees and the businesses a lift?

Pay transparency as a motivator

Research suggests bosses who open up to individuals about staff salaries within their company can receive demonstrable benefits in employee engagement, retention, trust and productivity.

A joint study by Cornell University and Tel Aviv University saw 280 participants paid to complete three rounds of a computer game. Half of the participants were informed about only their own performance and bonus pay, while the other half experienced were told what the other team members were being paid as well. The researchers found that greater transparency is associated with increased employee performance. Participants told only about their own remuneration recorded a distinctly lower level of performance during the tasks.

Which companies are transparent about pay?

Tech start-ups are leading the way on pay transparency. Social media management company Buffer, for example, shares employee salaries among staff and the wider public by posting them on the company’s website. The firm also publishes the formula used to calculate those salaries, which is based on an employee's role, experience, loyalty to the company, and stock options. Within a month of starting the initiative, Buffer received twice the amount of job applications.

The impact of publishing pay stats on company culture

Pay transparency can be a valuable way for bosses to reassure individuals that they are being treated fairly. A PayScale study found that when managers were open and honest with low paid workers by explaining the reason they are paid below the market rate, employees’ job satisfaction rose from 40% to 82%.

In contrast, employers who shy away from crucial salary discussions can find themselves in trouble. Infamously, the staff of Vanity Fair magazine were reportedly angered by a memo from management titled “Forbidding discussion among employees of salary received.” New York literary figures Dorothy Parker, Robert Benchley and Robert Sherwood, all part of the Algonquin Round Table, stood up for transparency and showed up for work the next day with their salary written on signs hanging from their neck.

Furthermore, speaking to professionals about peer wages can be used as a shrewd motivational tool, especially for young, ambitious workers. “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,” said David Burkus, the associate professor of management at Oral Roberts University, told the Harvard Business Review. “And even those high performers are more likely to work hard in order to demonstrate why they bring that much value to the organisation.”

The case against pay transparency

Critics of pay transparency say the process risks upsetting individuals and disrupting their team spirit. Professor of strategy and strategic leadership Todd Zenger says wage transparency is disruptive, especially when managers fail to communicate effectively how an individual’s performance and contribution is reflected in their pay. Zender concluded: “Widely publicising pay simply reminds the vast majority of employees, nearly all of whom possess exaggerated self-perceptions of their performance, that their current pay is well below where they think it should be.”

Furthermore, individual reactions to wage transparency may be more closely linked to how their pay compares to colleagues they work more closely with. For example, a lawyer earning £500,000 compared to a peer receiving £700,000 may feel just as unfairly treated as an administrator earning 30,000 whose colleague receives £40,000.

A solution

Therefore, top managers seek to strike a balance between complete transparency and a fair system by sharing pay ranges (e.g. £20,000-£30,000) and KPIs that indicate how wages are calculated.

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