Companies are facing a crescendo of calls for greater pay transparency as local, regional, and national governments across the globe are enacting laws designed to increase the visibility of pay practices. These changes are already forcing companies to abandon unfair, discriminatory compensation policies, but beyond this important and clearly desirable result, pay transparency’s influence is more difficult to assess. Empirical studies suggest that pay transparency may lower compensation overall, even as it removes inequities. It may also in some circumstances compromise employee productivity and affect companies’ ability to attract and retain high performers. Perhaps more dangerously, it skews employees to favor a specific aspect of performance over others, weakening the organization’s performance overall. How transparency is enacted, therefore, is critical to ensuring that the organization and its employees all benefit from it.
Although pay secrecy remains the informal norm or formal policy for roughly have of all U.S. employees, companies are facing a crescendo of calls for greater pay transparency. Local, regional, and national governments across the globe are enacting laws designed to increase the visibility of pay practices.
These laws range from requirements to report aggregated pay statistics by gender to laws that require the wholesale disclosure of individual pay or even tax returns. Starting November 1, 2022, New York City joined a growing list of city and state governments that now require the posting of “good faith” pay ranges with all new job announcements. Meanwhile, a profusion of websites, such as Glassdoor.com, Payscale.com, and Salary.com, as well as local employee efforts assembled on simple spreadsheets, are providing rather open access to employer pay information. With the growth of such pay transparency, the lingering norms and policies around pay secrecy have simply lost their teeth.
But is this transparency a good thing? Is it yielding desirable outcomes for individuals and organizations? A wave of recent academic studies has begun to provide important — but often complicated — answers. Here’s how pay transparency affects different dimensions of work.
Pay equity
On the positive side, pay transparency is reducing pay inequities across gender, ethnicity, sexual orientation, and other dimensions. Our recently published study in Nature Human Behavior, for instance, found that pay transparency’s rapid spread into public U.S. academic institutions has dramatically reduced the gender pay gap, even eliminating it in some states, and generally caused academic institutions to more consistently or equitably link pay to observable measures of academic productivity. Studies in other settings report similar reductions in the gender pay gap in response to pay transparency.
Beyond this important and clearly desirable result, pay transparency’s influence is more difficult to assess. Other empirical studies suggest that pay transparency, including the form of transparency required by the recent New York City law, actually lowers overall wages of the broader population of employees, even though it elevates pay for the inequitably underpaid. The underlying cause appears to be that, by publicly disclosing current pay or pay ranges, employers more credibly commit to not negotiating with prospective or current employees. They can claim now that any individual negotiations in which they engage precipitate having to negotiate with all (or many) others. In other words, this form of pay transparency, though it reveals employer’s salary expectations, may lower employees’ relative bargaining power.
Productivity
Our Nature Human Behavior study also suggests that while pay transparency brings more equitable pay — pay that is more consistently linked to performance across employees — it also results in pay that is flatter, more equal, and less performance based. This weakened relationship between pay and performance can lead to lower employee productivity — an outcome that seems to depend on what pay transparency reveals (and to whom). In another study, we found that if pay transparency revealed to employees that their company had been equitable and consistent in how it allocated pay to performance, then the overall employee productivity response was positive. However, if pay transparency revealed that it had unfairly allocated pay — for instance, by discriminating on the basis of gender — overall productivity declined.
Individual productivity responses also varied in predictable ways, based on what pay transparency exposed to individuals about how they had been treated individually. For instance, if pay transparency revealed to an employee that they had been underpaid, they became less productive. If pay transparency revealed inequitable overpayment (i.e., an employee earned more than their performance merited), that employee somewhat surprisingly elevated productivity. The latter employee’s motivation may be to justify their high pay to others, or perhaps reflects an awareness that with pay transparency, the only path to further pay increases is to dramatically improve performance.
Turnover
Pay transparency also shapes patterns of turnover. When employers compress or flatten pay in response to pay transparency, rendering pay less performance based, top performers are more likely to exit, as they search for organizations more willing to reward their higher performance (and perhaps keep their elevated pay more secret). Thus, it seems that the presence — in the same geographic location and industry — of both secretive and transparent organizations may generate important labor market adjustments.
Employee priorities
There is one final factor to consider. As discussed, pay transparency pushes organizations to be more consistent in rewarding observable performance measures. But what if easily observed performance measures don’t capture essential elements of the job, like cooperation, helpfulness, mentoring, or assistance to others? In these cases, transparency pushes individuals to heighten their focus on the performance metrics that pay transparency reveals shape pay.
A recent pay transparency study explored what happened when player salaries in the National Hockey League suddenly became transparent. This pay transparency glaringly revealed to the players that hockey salaries were largely determined by offensive performance metrics (goals and assists) with much less weight placed on defensive effectiveness — a performance dimension that’s much more difficult to measure, but nearly equal in importance. When pay and its basis became transparent, players responded predictably to the incentives it revealed: They increased goals and assists, but now neglected defense, and overall player performance in the league declined.
