Is pay transparency a double-edged sword?

The challenge of inflated perceptions of self-worth
Double-edged sword to show challenges of pay transparency.

There’s plenty of evidence to support having a transparent approach to pay.  For example, Glassdoor report that over 2/3 of employees globally link it to job satisfaction and business performance. 

It’s because transparency enables us to demonstrate fair pay that employees can trust:

“How people perceive their pay matters more than what they’re actually paid and the more information they have the less likely they are to quit” (Payscale).

This is why pay continues to crop us as a key driver of engagement (Aon).

Companies who have taken transparency to a new level by publishing individual salaries, report employees are happier as a result (Huffington Post).

For example, Buffer in the US publish individual salaries along with a formula based on job type, seniority, experience and location.  In the UK, GrantTree and Wholefoods have a similar approach.   They believe transparency breeds trust.

There are also countries where pay transparency is the norm.  If you live in Norway your salary is accessible on line as part of your tax return (BBC).  The intriguing part is that you can see who has accessed your data! 

However, a recent HBR article criticised the concept of pay transparency.  Describing it as a double-edged sword that does as much damage as good:

“widely publicizing 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”

Their study showed 92% of employees felt they were in the top ¼, and 40% of employees felt they were in the top 5%.  They conclude such extreme misconception of individual contribution makes pay too hard to justify.

This is also considered by the CIPD behavioural science of reward.  A tendency to overvalue our own skills in relation to others and expect commensurate rewards is termed endowment bias.

There’s no doubt that this mismatch makes fair pay hard to achieve and difficult to justify.

But, in my view, this makes transparency absolutely critical.  Now is not the time to reinforce a belief that something is unfair by keeping it a secret and refusing to talk about it.

Here’s the advice I would give: 

  1. Be as transparent as you can - this will mean different things for different organisations.  At the very least clearly set out how pay decisions are made and what factors (e.g. performance, market) are taken into account.  Then develop and openly share salary frameworks built on these factors.
  2. Think carefully about performance pay – it’s hard to make fair and consistent judgements about performance (Scullen et al  found ratings to be more about personal biases of the manager than performance of the individual).  Add inflated self-perceptions and something as emotive as pay to the mix and this really isn’t an approach to adopt half-heartedly.  For some organisations, a role-based approach to pay may be the better option.    
  3. Balance structure and flexibility – transparent frameworks such as pay ranges and progression principles will encourage consistent decision-making and aid transparency.  Where possible, formulas such as the one adopted by Buffer can also help but this is less flexible and may not work in agile, complex organisations.
  4. Provide support – support the decision makers to make fair and consistent decisions, particularly where discretion is involved.  They’ll need to fully understand the rationale behind your reward strategy and be aware of their own unconscious biases and what to do about them. And educate employees so they understand the information you're sharing.

Pay transparency may well be a double-edged sword.  But in my view the benefits of honest, truthful conversations far outweigh the challenges they present.

And although publishing individual salaries won’t be right for all organisations, there are some where this approach would be a very powerful demonstration of their values. 

 

At Verditer we partner with clients to make reward and performance management more effective.  Contact us to hear more about our approach to reward strategy, pay structures and bonus design.

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Picture courtesy of A Z Boomer