Pay Transparency: Conceptualization and Implications for Employees, Employers, and Society as a Whole
Pay Transparency: Conceptualization and Implications for Employees, Employers, and Society as a Whole
- Peter A. BambergerPeter A. BambergerColler School of Management, Tel Aviv University
Pay transparency refers to the degree to which pay communication policies and practices governing employee pay knowledge facilitate or restrict the sharing of pay-related information. While relatively few enterprises have adopted transparent pay-communication practices, a variety of institutional factors, such as government regulations and social norms, are driving employers to provide their employees with greater pay knowledge. Consensus has emerged around the existence of three main dimensions or forms of pay transparency, namely pay-outcome transparency, pay-process transparency, and pay-communication transparency. Research findings indicate that pay-outcome transparency, which relates to the degree to which pay rate information is disclosed by the employer, has both beneficial and problematic consequences, depending on the outcome. For example, while pay-outcome transparency has been consistently found to be associated with enhanced individual task performance and reduced gender-based pay discrepancies, it has also been associated with higher levels of envy, diminished helping, heightened levels of counterproductive work behavior, and pay compression (which could elicit negative sorting effects). In contrast, pay-process transparency, which relates to the degree to which employees are informed about the parameters underlying reward-related decisions, has been found to have largely beneficial consequences and few unintended negative consequences. Finally, while it is least studied, pay-communication transparency, capturing the degree to which restrictions are placed on employees’ ability to share pay knowledge with others, is positively associated with employee perceptions of employer fairness and trustworthiness and can have significant implications for employee retention.
- Human Resource Management
- Organizational Behavior
Although pay communication, and in particular pay transparency, has long been a contentious issue, pay administration—the broader topic under which pay communication falls—has been one of the most under-researched aspects of compensation (Gupta & Shaw, 2014). Nevertheless, with rising concerns over inequality and gender- and race-based pay disparities, the issue of pay communication is attracting increasing attention among researchers, practitioners, and policymakers. Of central concern are questions regarding the consequences of pay communication, particularly whether pay transparency is beneficial or harmful to employees, employers, and society at large. But before reviewing the research evidence regarding such questions, this article begins with a brief discussion of what we know about the nature of pay communication, and the factors driving the growing interest in the topic.
What Is Pay Communication?
Broadly conceived, pay communication relates to organizational policies and practices governing the sharing of pay-related information, and the degree to which these policies and practices facilitate or restrict the sharing of such information. Ingrid Fulmer and her associates (Arnold et al., 2018; Fulmer & Chen, 2014) proposed that pay-communication policies and practices can be positioned along three orthogonal dimensions of communication restrictiveness, with organizations’ potentially adopting different information-sharing policies and practices for differing forms of pay (i.e., base pay, incentive pay, benefits) on each dimension. The dimensions are:
Pay-outcome transparency—The disclosure of actual pay rates or levels.
Pay-process transparency—The sharing of information with employees about how pay is determined, and the factors considered in deciding to pay some positions or individuals more than others.
Pay-communication transparency—The freedom to solicit pay information from one another and/or to share one’s own pay information with others.
Not only may organizations choose to be more-or-less transparent along these different dimensions, but also even within a particular dimension they may display varying policies and/or practices for different forms of pay. For instance, a company may disclose salary (i.e., base pay) ranges for various jobs or pay levels in the organization (a moderate degree of pay-outcome transparency), but no information on the range of merit increases or bonuses paid. Similarly, a company may provide extensive information about how benefits are determined, but only the most general information about the processes used to determine pay raises, and no information about how the firm sets bonuses or incentive payments.
Prevalence and Drivers of Varying Forms of Pay Transparency
Both in Europe and in the United States, only a small minority of enterprises have adopted more transparent pay-communication practices. For instance, among nearly 500 Swiss organizations, Arnold et al. (2018) found that employees are provided with exact individual pay information in less than 20% of the enterprises that responded to the question. Moreover, for each outcome, 20% to 40% of the responding organizations reported that they disclosed no substantive information to employees—not even aggregated pay data, such as average range of pay for jobs at a certain level. Similar results were found with respect to pay-process and pay-communication transparency. Arnold et al. also found a tentative but limited trend toward greater openness: pay-transparency policies and practices across all three dimensions were largely unchanged over the previous 2 years for most of the surveyed firms, though about 15% of firms reported reduced restrictiveness (i.e., greater transparency) with respect to pay outcomes and processes.
Data from other countries present a similar picture. A 2019 LinkedIn global survey of talent professionals found that only 27% of the companies represented by these professionals offered some degree of pay transparency. Two thirds of the companies reported sharing salary ranges with candidates early in the hiring process, 59% shared ranges with employees, and 48% shared ranges publicly on job posts. In terms of pay-outcome transparency, in 2018 only 38% of surveyed enterprises furnished employees with data on the base pay range for employees in their pay grade, down from approximately 45% in 2014. The highest level of pay-outcome transparency (disclosing actual pay levels for all individual employees) was reported by only 1% of participating enterprises in 2020 (down from 2% in 2019 and from 5% just 2 years before that; WorldatWork, 2020). Furthermore, a 2018 study by the Institute for Women’s Policy Research found that among private employers in the United States, 41% discourage wage and salary discussions and 25% outright forbid them (Westfall, 2019).
Explaining the Variance
Institutional factors, particularly national and state/regional legislation, likely account for much of the variance in pay-transparency policies and practices. In some countries, existing laws make it illegal for employers to contractually restrict employee pay disclosures. For example, in the United States, since the 1976 Jeannette Corp. v. NLRB decision of the U.S. Court of Appeals, Section 7 of the National Labor Relations Act (passed in the 1930s) has consistently been interpreted by the courts as protecting employees’ rights to disclose wage and salary information to one another. In other countries, regulators have gone so far as requiring employers to disclose detailed pay information to government authorities or even to the workforce, particularly where gender-related pay-disparity concerns exist. For instance, Norway’s Act no. 562, adopted in June 2006, aims “to promote visibility and information about wage differentials” by requiring employers with a minimum of 35 employees to annually either (a) provide employees and their representatives (but not the public) with access to gender-based wage statistics, or (b) disseminate an internal report describing how wages are determined and laying out an action plan for the implementation of equal pay (Bennedsen et al., 2019). More widespread regulatory action in Europe was prompted by the European Commission’s release of pay-transparency guidelines in 2014 (Veldman, 2017). Among other things, the guidelines recommended that members states adopt regulations:
guaranteeing an employee’s right to request information on gender pay levels for the same work or work of equal value;
requiring employers to report to a government authority on average gender pay levels by category of employee or position;
requiring employers to conduct audits on pay and pay differentials on grounds of gender;
requiring employers and employee representatives to discuss gender pay disparities at the appropriate collective bargaining level.
As noted by Veldman (2017), a dozen European countries have already adopted some or all of these recommendations. For example, in April 2017 the United Kingdom extended its Equality Act 2010 by requiring all enterprises with more than 250 employees to annually publish information relating to the gender pay gap in their organizations. Under these regulations, organizations are required to report differences in the average hourly rate of pay to male and female employees, differences in the average bonuses paid to male and female employees, the proportion of male and female employees receiving bonuses, and the proportion of male and female employees in each quartile pay band. A copy of each year’s report must be made available to the public through the employer’s own website for at least 3 years from the date of publication.
But even within countries and regions, there may be substantial variance in pay-communication policies and practices across enterprises stemming from noninstitutional forces, such as technological innovation. In particular, the founding of Glassdoor in 2007, and the ability of tech-savvy individuals to anonymously and securely exchange personal pay data with one another, has made employer restrictions on employee pay disclosure largely irrelevant, thus drastically reducing the degree of pay-information asymmetry in the workplace. Karabarbounis and Pinto (2018) reported that between 2010 and 2017, annual user salary entries (required for salary searches) on Glassdoor went from approximately 290,000 to around 1,100,000.
Human capital and labor market factors may also account for some of the variance. Using their Swiss employer data, Arnold et al. (2018) found that pay-process transparency was associated with the proportion of the organization’s workforce possessing a university-level education. Similarly, they found that pay-outcome transparency was more prevalent in public (versus private) organizations, in enterprises with a higher percentage of unionized employees, and in larger firms.
Finally, anecdotal evidence suggests that some organizational leaders are eager to adopt more transparent pay policies and practices as a means of reinforcing climates characterized by integrity, trust, fairness, and openness (Trotter et al., 2017). For instance, according to Whole Foods co-CEO John Mackey, the early adoption of pay-outcome transparency at this large grocery chain was driven by an interest in boosting employee trust in management (Mackey & Sisodia, 2013). As Mackey wrote in his blog in 2010: “Creating transparency and authentic communication is an ongoing challenge that every organization faces. We must continually strive to remove the barriers that prevent them, knowing that we can’t maintain high levels of organizational trust without transparency and authentic communication.”
Impact on Employee Attitudes and Behavior
Researchers have examined three main types of pay-communication consequences at the individual level, namely employee pay knowledge; work-related attitudes, such as trust and retention intentions; and behavior, such as task and contextual performance.
Impact of Restricted Pay Communication on Employee Pay Perceptions
Some of the first studies on pay secrecy were aimed at estimating the degree to which pay secrecy skews employee perceptions of others’ pay. In his seminal research, Lawler examined seven organizations. While the three public-sector organizations examined made public the pay ranges for all positions, the four private organizations all followed a policy of strict pay secrecy. After securing average salaries for all managerial positions in all seven organizations, Lawler asked managers in each company what they believed to be the average yearly salary of managers at their present level, one level above them, and one level below them. In the public organizations, managers tended to overestimate the pay of those one level below them (by an average of $340) and those at the same level (by an average of $161). The error in their estimate of earnings for those above them was only $24 and not statistically significant. In the more pay-secretive private firms, while managers also tended to overestimate the pay of those below them, the average error was $475, over 35% higher than the (mis)estimates of their peers in the public sector. For managers at their own level, respondents’ estimates were not significantly different from actual pay (with an average overestimate of $64). However, the private-sector managers grossly underestimated the pay of those one level above them, by an average of $425. Over 62% of the private-sector managers underestimated the pay of their superiors one level above (while only 27% of the private-sector managers overestimated their superiors’ pay). A subsequent study of managers in a different private-sector firm (Lawler, 1967) showed a similar pattern, with the magnitude of misperception far greater with respect to the managers’ perception of the pay of those hierarchically superior to them relative to those one or two levels below them (average overestimates of $540 and $290, for those two and one levels below them, respectively, vs. $1,208 and $4,980 for those one and two levels above them, respectively).
Following an early replication by Milkovich and Anderson (1972), Cullen and Perez-Truglia (2018), using data from a large bank, reported a pattern of findings remarkably similar to those found by Lawler (1965, 1967). Roughly the same proportion of the bank’s employees over- and underestimated their peers’ pay, with the misestimates being relatively small. In contrast, consistent with Lawler’s findings, only 12% of the bank employees estimated the pay of those one level above them within 5% of the actual figure, with a mean absolute error for perceived manager salary of 28%, more than double that for peers (11.5%). Most significantly, misperceptions of managerial pay were skewed, with the average employee underestimating managerial pay by more than 14%. More importantly, while Lawler could only speculate about what his results might mean with respect to employee motivation and retention, Cullen and Perez-Truglia actually assessed this impact. Consistent with Lawler’s expectations, in terms of task motivation, they found that increasing the already (slightly) overestimated perceptions of peer pay by an additional 1% would decrease hours worked by nearly 1% (p. 3). In contrast, a similar 1% increase in (underestimated) manager pay would result in a small but statistically significant increase of 0.2% in the number of hours worked (p. 3). In sum, these findings suggest that overestimation of peer salaries and the more substantial underestimation of managerial salaries may be detrimental to employee motivation.
Attitudes: Job Satisfaction, Justice/Fairness, Envy, and Trust
In contrast to the employee pay-knowledge findings just reviewed, research on the implications of pay communication on employee attitudes is less consistent, with some studies reporting beneficial effects and others reporting more adverse effects.
Initial research on how pay transparency might influence employee attitudes followed up on Lawler’s conjecture that relative to pay secrecy, pay transparency would give rise to greater job satisfaction. In one of the few field experiments conducted on the implications of pay communication, Futrell and Jenkins (1978) collected data from 500 pharmaceutical sales employees. About 30% of the employees were randomly assigned to a pay-transparency (experimental) condition, and the remainder to a secrecy (control) condition. A month after taking baseline satisfaction assessments, partial pay-outcome transparency was introduced for the experimental group. Sales personnel in this condition were given the mean rates and range of pay for varying levels of seniority in the company, as well as relative performance scores and the firm’s low, average, and high merit increase rates. After a year, the attitude survey was repeated for employees in both groups, with the results indicating that, relative to the initial survey, those in the pay-transparency condition experienced a significantly greater increase in pay-, promotion-, and work-related satisfaction than those in the control condition.
Day (2007, 2011) collected data on pay-process transparency perceptions from two samples, namely a small sample of employed graduate business students (2007), and a larger sample of university employees (2011). While her initial (2007) findings indicated a consistent null association between perceptions of pay-process transparency and such pay-satisfaction variables as pay-raise satisfaction, pay-level satisfaction, pay-administration satisfaction, and benefit satisfaction, the results of her subsequent study indicated a positive, justice-mediated effect of pay-process transparency on these same four dimensions of pay satisfaction.
Fairness and Justice
Research has also focused on employees’ justice-related attitudes (e.g., distributive and procedural justice; Colquitt, 2001) because theoretical studies (see Colella et al., 2007) suggest that such attitudes may link pay communication to specific behavioral outcomes. At first glance, pay-outcome transparency should make those responsible for pay-allocation decisions more accountable, thereby eliminating disparities and driving more equitable pay structures that should ultimately boost distributive justice perceptions. Similarly, pay-process transparency should boost procedural justice.
However, these effects may not be as simple and straightforward as suggested. For instance, policies that give employees access to others’ personal pay information may violate the latter’s right to personal privacy, and thus be deemed as harming, rather than promoting, informational and interpersonal justice (Smit & Montag-Smit, 2018). Furthermore, consistent with the certainty effect (the idea that when making judgments, people tend to overweight outcomes that are certain relative to those that are just probable; Kahneman, 2011), Bamberger and Belogolovsky (2017) argued that pay-outcome transparency has the potential to amplify perceptions of pay unfairness by making allegedly unfair allocations more vivid and difficult to dismiss.
Several empirical studies offer insight on how pay-communication policies and practices may affect employees’ justice perceptions. Experimental evidence indicates that at least one form of pay transparency, namely pay-process transparency, has largely beneficial implications for perceptions of procedural and distributive justice. In a study of private-sector workers, SimanTov-Nachlieli and Bamberger (2021) asked study participants to complete measures of process and outcome pay transparency as well as their perceptions of procedural and distributive justice. Consistent with the findings of Day (2011), they found pay-process transparency to have a significant positive correlation with both procedural justice and distributive justice, and—in multiple regression analyses—to explain over a fifth of the variance in perceptions of both justice forms.
Findings regarding the effects of pay transparency on distributive justice are less clear. In an experimental study, Belogolovsky and Bamberger (2015) posited and found the impact of pay transparency on distributive justice perceptions to vary as a function of individual competitiveness. Building on the idea that (a) in assessing distributive fairness, what matters for more competitive individuals is that their pay exceeds that of relevant others, and (b) in the absence of pay information, individuals upwardly bias their pay estimates for comparison peers (Lawler, 1965, 1967), Belogolovsky and Bamberger argued that pay secrecy should be inversely associated with distributive justice perceptions, and that this should be particularly true for more interpersonally competitive individuals. Consistent with this theorizing, in an experimental study comparing complete pay-outcome transparency to complete secrecy, they found a significant negative main effect of pay secrecy on distributive justice perceptions. Moreover, as hypothesized, this main effect was driven largely by the more competitive participants.
In contrast to the student-based experiment of Belogolovsky and Bamberger (2015) just described, SimanTov-Nachlieli and Bamberger (2021) posited and found that rather than varying as a function of individual disposition, the impact of pay-outcome transparency on distributive justice perceptions varies as a function of individuals’ level of pay relative to that of comparative peers. Using a field study design, they found that perceived pay position indeed moderates the effect of pay-outcome transparency on perceived distributive justice. Pay-outcome transparency was associated with lower perceived distributive justice among participants who positioned their pay below that of referent others. In contrast, among those perceiving their pay as higher than that of others (one standard deviation unit above the mean), there was a positive—but not statistically significant—association between pay-outcome transparency and distributive justice perceptions. In a second experimental study, they manipulated pay-outcome communication conditions such that a quarter of participants were assigned to a secrecy condition, and the remaining participants were assigned to a transparency condition and were paid (a) far less, (b) a little less, or (c) more than their peers. Compared to the results for the secrecy condition, there were significantly lower distributive justice perceptions among those in the pay-outcome transparency condition who were in the two lower-paid conditions (lowest for those paid far less). In contrast, compared to the results for the secrecy condition, there were significantly higher distributive justice perceptions among those in the pay-outcome transparency condition who were in the condition where they observed they were paid more than their peers. The condition assignment alone explained nearly 30% of the variance in distributive justice perceptions.
Taken together, these studies indicate that pay-outcome transparency may have mixed effects on employees’ perceptions of distributive justice. Where pay is understood to be a function of justifiable (i.e., objective) differences in performance, disclosing relative pay information may have beneficial results, particularly among those disposed to be more competitive (for whom such comparisons are more salient). But in the majority of situations, where the link between performance and pay is uncertain, the findings of SimanTov-Nachlieli and Bamberger (2021) suggest that the impact of pay-outcome transparency on distributive justice perceptions depends largely on employees’ perceptions of where they fall in comparison to others with respect to their pay.
One of the primary arguments made by those opposed to pay transparency has been that increased pay visibility and employee pay disclosures are likely to engender episodic envy, the negative emotion felt “when a person lacks another’s superior quality, achievement, or possession and either desires it or wishes the other person lacked it” (Parrott & Smith, 1993, p. 906). To investigate this claim, Bamberger and Belogolovsky (2017) built on the certainty effect noted earlier, arguing that due to the vividness of the pay information obtainable under conditions of greater pay transparency, pay transparency is likely to generate stronger feelings of episodic envy than pay secrecy. More specifically, they argued that pay transparency engenders envy because the information vividness associated with objective, concrete, realistic comparisons makes individuals likely to have stronger emotional reactions (Kahneman, 2011; Nisbett & Ross, 1980) and because the certainty effect makes it difficult to dismiss realistic comparisons, thus reinforcing the salience of deprivation-related information (Tversky & Kahneman, 1983). They also posited that this effect would be amplified among those maintaining more collectivistic (versus individualistic) orientations, because social comparison theory suggests that the former tend to engage in more intense comparisons with others. In contrast, consistent with research on information ambiguity (Van Dijk & Zeelenberg, 2003), they posited that pay secrecy leads to constructive comparisons that are easily discounted or rationalized away. Using a lab-based experimental design similar to that used in their earlier work, Bamberger and Belogolovsky (2017) tested this reasoning on 146 Singaporean undergraduate business students, assigning them to transparency versus secrecy conditions. Although no main effect of pay transparency on episodic envy was found, as posited, pay transparency was positively associated with envy of individuals’ highest-paid colleagues among those individuals expressing a more collectivistic orientation.
Similar findings, indicating an adverse effect of pay transparency on peer envy, were reported by Schnaufer et al. (2018). Their longitudinal field study involved employees of a German technology company following introduction of a company-wide transparency initiative. The effects were more robust among employees who (a) were more sensitive to injustice and (b) had a stronger latent fear of being exploited, what the researchers referred to as “victim sensitivity.”
Trust is defined as “the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party” (Mayer et al., 1995, p. 712). Montag-Smit and Smit (2020) argued that different transparency dimensions may have different trust implications. More precisely, they suggested that pay-process and pay-communication transparency should be associated with greater employee trust in management to the extent that individual employees can control how much personal information about their own pay is disclosed to others. Where pay transparency involves the disclosure of individual pay (i.e., pay-outcome transparency), trust in management may rise or fall depending upon individuals’ information-sharing preferences. Pay-outcome transparency may lead to diminished trust among individuals who prefer not to share pay information, or conversely, to heightened trust in management for those with positive sharing preferences. Testing these propositions using a cross-sectional survey, Montag-Smit and Smit (2020) found that pay-transparency policies and practices affect employee trust in management by shaping employee attributions of the employer’s motives: More restrictive pay-process and pay-communication policies were positively associated with malevolent attributions (and negatively with benevolent attributions) and, accordingly, with lower levels of trust, particularly among those more willing to share their own pay information.
In contrast to these findings, Alterman et al. (2021) argued that trust effects may depend on perceptions of organizational-level differences in distributive fairness. Building on uncertainty management theory (Lind & van den Bos, 2002), they proposed that individuals may be unable to make informed fairness or trust assessments without considering some additional justice cues. They suggested that distributive justice serves as one of those cues, such that when distributive justice is considered in the context of pay secrecy, employees are likely to dismiss aversive fairness information. More specifically, in the context of pay secrecy, there is no clear evidence that pay has in fact been unfairly allocated. In contrast, consistent with the certainty effect (Kahneman & Tversky, 1979), when pay is more transparent, the vivid content of that information may make it difficult for employees to deny distributive injustice, thus eliciting more negative assessments of organizational trustworthiness. Based on this logic, and using a sample of Chinese part-time (i.e., employed) MBA students, Alterman et al. posited and found that when employees perceive distributive justice in their organization as deficient, the relationship between pay-secrecy perceptions and organizational trust is positive, with greater pay secrecy linked to higher trust, and greater transparency to lower trust. In contrast, when employees perceive distributive justice in their organization as robust, the relationship between pay secrecy and trust is inverse—that is, where pay is more transparent, perceptions of distributive justice (i.e., fair pay) reinforce transparency-based inferences that the organization is trustworthy, whereas in the context of pay secrecy, the uncertainty surrounding outcome-based inferences results in a more muted trust reaction.
Behaviors: Task and Contextual Performance
Starting in the 1960s, theorists argued that more restrictive pay practices, by distorting employees’ perceptions of relative pay, adversely affect motivation and hence job performance (Colella et al,. 2007; Lawler, 1965). Underlying this proposition was equity theory (Adams, 1963) and the idea that, with pay secrecy’s distorting perceptions of others’ pay, typically to one’s own disadvantage, employees seek to restore balance to their reward/contribution ratio by increasing their rewards and/or reducing their contribution. Despite the underlying logic of this proposition, findings from studies testing this equity-mediated model have been mixed, particularly with respect to task performance.
One of the first studies to test the equity-mediated model was done by Futrell and Jenkins (1978). Findings from their field experiment suggest robust support for the idea that transparency is positively associated with task performance. Additionally, while the researchers did not assess perceived equity directly, their findings of a link between pay transparency and greater job satisfaction are suggestive of a tit-for-tat explanation, in which employees reciprocate their enhanced job satisfaction by increasing their effort and contribution.
Decades later, researchers conducted several experimental studies using designs aimed at further testing the impact of pay transparency on task performance and specifying the mechanism potentially underlying it. Bamberger and Belogolovsky (2010) combined equity theory and fairness heuristics theory (Lind, 2001) to posit that distributive fairness perceptions would explain the negative impact of pay secrecy (relative to transparency) on objective task performance. More specifically, they argued that while employees are always concerned about the fairness of their pay, under conditions of pay secrecy, they have little choice but to draw inferences from other fairness indicators, such as those connected to procedural and informational justice. Assuming that rewards are directly tied to objectively assessed performance, to the extent that employees’ access to pay-related information is more restricted, they are likely to draw negative inferences regarding procedural and informational fairness and to use these inferences as a basis for perceptions of distributive fairness. Equity theory (Adams, 1964) would then predict a downward adjustment of effort for employees working under conditions of pay secrecy, thus depressing their performance (relative to those working under conditions of pay transparency). Bamberger and Belogolovsky’s findings were largely consistent with this theorizing. First, they found that while mean performance rose over the trial rounds in the pay-transparent condition, mean performance dropped in the secrecy condition. Similarly, mean distributive fairness perceptions increased over this interval in the pay-transparent condition, but declined slightly in the secrecy condition. More precise tests of the indirect effect of pay secrecy (vs. transparency) via distributive fairness perceptions indicated that this indirect effect was in the negative direction expected and was statistically significant, accounting for approximately 17% of the total effect of secrecy on task performance. Finally, moderation analyses indicated that the effects of pay secrecy on task performance via distributive fairness were amplified for—and largely driven by—those employees who were more interpersonally competitive. Two subsequent studies offered further support for, and insight into, these generally positive effects of pay-outcome transparency on individual task performance.
“Hiring” a sample of MTurk piece-rate paid workers to enter bibliographic information from journal articles into a database, Huet-Vaughn (2013, 2014) randomly assigned his “employees” to one of two conditions. In the control condition, participants were told only their own earnings. In the treatment condition, they were also told how their earnings compared with those of a group of fellow employees. Huet-Vaughn found that, on average, participants’ output (the number of correctly entered bibliographic entries) was roughly 10% higher in the treatment condition, but all of this productivity boost was driven by those who were informed of their earnings relative to a low-performing peer group, such that the treatment participants ranked higher on average in the earnings distribution.
Belogolovsky and Bamberger (2014) used a design similar to their 2010 study to test an alternative explanation for the adverse impact of pay secrecy on individual job performance. This time, drawing from expectancy theory and the findings reported by Lawler in the 1960s, they posited and found that pay secrecy degrades task performance by adversely affecting employees’ effort–pay instrumentality perceptions (what the authors referred to as pay-for-performance or PFP perceptions), with these effects exacerbated by any situational (rather than individual difference) factor that might weaken the expected impact of effort on rewards. More precisely, they argued and found that Lawler’s seminal finding—that under conditions of pay secrecy, people overestimate the pay of their peers and underestimate that of their superiors—effectively compresses the perceived (relative to the true) range of pay for varying levels of contribution. Based on expectancy theory (Vroom, 1964), this compression in perceived PFP reduces employee effort, leading to diminished performance, particularly where (a) effort–reward contingencies are made even more uncertain, such as when performance is assessed subjectively rather than based on objective measures, or where (b) performance is assessed relative to others (e.g., pay is contingent on ranked performance) rather than on the basis of some absolute criterion (e.g., meeting a minimal level of performance).
The findings of Bamberger and Belogolovsky (2014) are important for several reasons. First, they replicate earlier findings indicating that more restrictive pay-communication practices may adversely affect individual job performance. Second, they offer further insight into the motivational basis for such effects, suggesting that pay secrecy may degrade employee motivation as a function not only of reduced fairness perceptions (an explanation consistent with equity theory), but also of reduced instrumentality perceptions (an explanation consistent with expectancy theory). Finally, these findings held across the board for all employees, in contrast to studies that suggested that the impact of pay-outcome transparency on job performance was somewhat contingent on individual differences, such as interpersonal competitiveness (Bamberger & Belogolovsky, 2010) or narcissism (LaViers, 2019).
Contextual Work Behavior
Contextual work behavior refers to positive and negative work behaviors that go beyond nondiscretionary task performance (Borman & Motowidlo, 1997, p. 100). Positive contextual work behaviors typically come under the rubric of organizational citizenship behavior (OCB), while negative contextual work behavior is often referred to as counterproductive work behavior (CWB) and is in many ways the semantic opposite of OCB (Dalal et al., 2009). It includes any volitional employee behavior that harms, or is intended to harm, the legitimate interests of an organization (Sackett & DeVore, 2001; Spector et al., 2006).
Conceptual discussions of how pay-communication policies and practices may affect contextual behavior also point to both positive and negative effects. For example, based on social exchange theory (Blau, 1964), Marasi et al. (2018) suggested that pay transparency has a positive effect on OCB, and a negative association with workplace deviance behaviors or CWB. Following the logic described earlier with respect to organizational justice, they argued that when pay communication is restricted, employees are likely to suspect the organization of engaging in unfair practices at employees’ expense and to reciprocate by withholding discretionary cooperative work behaviors (e.g., OCB) and engaging in more deviant behavior (CWB). Equally, when employees are given less restricted access to pay information, they are likely to perceive such policies as indicating informational, procedural, and distributive fairness on the part of the employer, and to reciprocate by avoiding any deviant behavior and boosting their engagement in OCB.
Others suggest more negative effects. For instance, as discussed earlier, under conditions of greater pay-outcome transparency, employees may observe discrepancies that they would otherwise not suspect or would dismiss as unlikely. Where such disclosures reinforce perceptions of distributive unfairness, the reciprocity expected by Marasi et al. (2018) may be unlikely to emerge. Furthermore, to the extent that pay-outcome transparency may lead to envy, it is reasonable to expect adverse consequences with regard to OCB. Indeed, logically, envious employees might even actively pursue actions aimed at harming their envied coworkers (i.e., CWB). Thus, in this line of reasoning, pay-outcome transparency may be inversely related to helping, a central dimension of OCB, and may even be positively related to sabotage, cheating, or theft, central dimensions of CWB.
Three empirical studies have attempted to resolve this debate. Marasi et al. (2018) used a cross-sectional, survey-based design to test a model in which pay-communication openness was associated with heightened levels of OCB via enhanced informational and distributive justice perceptions. Using a sample of 611 American MTurk workers, they found no link between pay openness and either OCB or CWB via distributive justice. However, they did find the expected positive effect on OCB via informational justice perceptions. Additionally, they found evidence of a weaker indirect, negative effect of pay openness on CWB via informational justice perceptions.
Bamberger and Belogolovsky (2017) used an experimental design in which students assigned to transparency and secrecy conditions were asked to solve anagrams in return for performance-based pay. Additionally, participants received periodic help requests from their “teammates” (all confederates). The number of help requests from the highest-paid (and thus most enviable) teammate to which the participant acceded served as the indicator of help-giving or peer collaboration. Extending the findings regarding a positive effect of pay transparency on envy, the results also indicated an inverse association between the envy expressed toward the highest-paid teammate and the provision of help to that individual. This negative effect was attenuated among participants who scored high in measures of prosocial orientation, but amplified among those who, by disposition, were less prosocial. Combining both elements of their experimental model, the authors found pay-outcome transparency to have a robust indirect and negative effect on peer helping via episodic envy, particularly among individuals who were more collectivistic and less prosocial in orientation.
Finally, in the Nachlieli-SimanTov and Bamberger (2021) study already discussed, the researchers sought to examine the role of distributive and procedural justice perceptions in explaining a possible effect of pay-outcome and pay-process transparency on CWB. As already noted, based on uncertainty management theory, they posited and found pay-process transparency to be positively related to procedural justice perceptions among American and British private-sector workers. Pay-process transparency was also positively associated with distributive justice perceptions. Extending the findings of Marasi et al. (2018), they found procedural justice perceptions to be inversely associated with the frequency of self-reported CWB directed against the organization (e.g., theft), and both procedural and distributive justice perceptions to be inversely associated with CWB directed against the organization and fellow employees (e.g., aggression, sabotage).
Their findings with regard to the effect of pay-outcome transparency on CWB were more complex, given that the effect of pay-outcome transparency on distributive and procedural justice perceptions was found to be contingent on the participant’s self-perceived pay status relative to others. For those perceiving their pay to be above that of comparative others, there was a positive association with distributive justice, but for those perceiving their pay to be lower, the association was negative. Moreover, among those at the high end of the perceived pay ladder, those for whom relative pay information was more accessible reported higher distributive justice and less frequent engagement in both forms of CWB. However, for those at the lower end, the effects were precisely the opposite: diminished distributive justice and more frequent engagement in CWB directed against both the organization and coworkers. Moreover, in their experimental follow-up study, Nachlieli-SimanTov and Bamberger found that relative to those in a secrecy or high-pay transparency condition, those in a transparent but underpaid condition were more likely to cheat (i.e., steal from the investigator) and to engage in more deceptive and unfair behaviors toward an anonymous co-participant (“coworker”).
These findings, while somewhat divergent, are reconcilable. The Marasi et al. (2018) study used a broad-scale measure of pay-communication openness that encompassed all three dimensions of this construct. The fact that no indirect effect via distributive justice was found suggests that the beneficial indirect effects on increased OCB and reduced deviance behavior (CWB) via informational justice were likely driven by pay-process and pay-communication transparency. As noted earlier, these two pay-transparency practices neither impinge on employee privacy preferences nor offer the kind of pay-outcome information that might be suggestive of unfair reward allocation on the part of the organization. Accordingly, to the extent that these two practices are perceived as promoting informational justice, reciprocity in the form of heightened OCB and reduced organization-directed CWB is most reasonable.
In contrast, the study by Bamberger and Belogolovsky (2017) focused strictly on how pay-outcome transparency affects peer helping behavior; and they examined one particular scenario, in which the pay information disclosed indicates one’s pay is below that of a peer. This suggests that while pay-communication and pay-process transparency may lead to increased OCB, pay-outcome transparency may be problematic with respect to a central dimension of OCB, namely helping behavior. Such an explanation is further reinforced by the findings of SimanTov-Nachlieli and Bamberger (2021), in that while they, too, found largely beneficial (CWB-reducing) effects for pay-process transparency, the effects of pay-outcome transparency were more complex, suggesting that while pay-outcome transparency may result in diminished CWB for those at the high end of relative pay, for those at the bottom end, pay-outcome transparency elicits behaviors detrimental to both the organization and the employee’s peers.
Impact on the Firm
Many of the individual-level consequences of pay transparency already discussed can, in theory, have significant enterprise-level implications. Accordingly, research has also examined the implications of pay transparency for an organization’s stock of human capital resources, for other aspects of pay, such as pay dispersion and form, and ultimately for firm performance.
Attraction and Retention of Human Capital Resources
Three main questions arise when considering how pay communication may affect an organization’s ability to attract and retain human capital resources, namely, the degree to which pay-communication policies and practices affect organizations’ ability to efficiently meet their recruitment objectives, employee turnover intentions and rates, and the qualitative nature of the shifts in human capital resources (i.e., sorting effects).
As suggested by Rynes (1987), pay-related practices send signals to potential employees about the organization’s “philosophy, values, and practices,” and particularly the nature of its employment relations. Accordingly, more transparent pay might be interpreted as suggesting that the organization values transparency and openness more generally, has nothing to hide, and can thus be deemed a more trustworthy institution in which to “park” one’s human capital (Cable & Judge, 1994). On the other hand, for those placing a high value on personal privacy, such a signal might reduce the attractiveness of the organization, thus motivating talent with such values to look elsewhere (Smit & Montag-Smit, 2018). In short, pay-transparency policies and practices may influence both positive and negative attributions held by candidates about potential employers.
While research has yet to examine the direct impact of pay-process, pay-outcome, or pay-communication transparency on recruitment, insight may be drawn from a study done by Smit and Montag-Smit (2018). The study revealed direct effects of both pay-process and pay-communication restrictiveness on attributions regarding the employer’s pay practices, with restrictions on pay-process transparency inversely/positively associated with benevolent/malevolent attributions, and pay-communication restrictions positively associated with malevolent attributions. As for pay-outcome policies, the study found restrictiveness to be positively associated with malevolent attributions only among participants with stronger preferences for pay transparency.
To date, three studies have examined the turnover and sorting effects of pay-communication policies and practices, with two focusing on the effects of pay-outcome transparency, and a third on pay-process and pay-communication transparency. Belogolovsky and Bamberger (2014) examined the impact of pay-outcome transparency on participants’ intentions to remain part of the laboratory experiment discussed earlier. Consistent with their theorizing, the results demonstrated a direct effect of pay-outcome communication on participants’ retention intentions: After controlling for pay-determination criteria and subjectivity of assessment, pay secrecy was negatively related to participants’ willingness to continue in the task. Moreover, as predicted, this effect was explained by participants’ more compressed pay-for-performance perceptions under conditions of pay secrecy (relative to transparency), particularly among higher performing participants assigned to the objective (versus subjective) assessment condition (suggesting a positive sorting effect).
Using a field-based approach, Card et al. (2012) found similar results, but, importantly, their results also generalized the effects of pay-outcome transparency beyond pay-for-performance contexts, and demonstrated that the effects go beyond withdrawal/retention intentions and affect actual withdrawal behavior. The study took advantage of a court decision in California that declared public-sector employees’ wages to be public information, and a decision by a local newspaper to set up a searchable database covering the salaries of all state employees, including University of California (UC) faculty and staff. The investigators randomized a sample of UC employees into two groups. One group (the treatment group) was informed about the newspaper’s website and given its URL, while the other (control) group was informed about a UC site that disclosed the pay of UC’s top administrators, but not other UC staff. After giving participants a week to check the suggested websites, the investigators surveyed all participants regarding their job satisfaction and intentions to leave. Two to three years later, they also collected data on employee withdrawal, identifying those study participants who no longer had a UC email address.
No main effect of exposure to peer salary information on withdrawal intentions was found. However, consistent with the findings of Belogolovsky and Bamberger (2014), there was evidence of a moderation effect. More specifically, for those in the treatment (transparency) condition, participants whose pay fell below the median for their department and occupation group (and particularly those in the lowest quartile of their pay distribution) expressed greater intentions to look for a new job. In contrast, those with higher salaries in the treatment condition reported job-search intentions not significantly different from those in the control condition. Moreover, participants’ job-search intentions were highly predictive of actual turnover 2 or 3 years later.
These findings are interesting and important for several reasons. First, they offer further evidence of a link between pay-outcome transparency and employee turnover. Second, in contrast to Belogolovsky and Bamberger, who found a significant positive effect of transparency on retention with respect to pay-for-performance (i.e., bonus), Card et al. suggested a negative effect with respect to base pay (i.e., salaries). However, in terms of the sorting effects identified, the findings of these two studies are remarkably similar, in that both suggest that pay-outcome transparency has a positive sorting effect. While Belogolovsky and Bamberger found the positive effects of transparency on retention to be most robust among higher-performing (and thus better-paid) participants, Card et al. found the positive effects of pay-outcome transparency on turnover to be most robust among those ranked toward the lower end of their pay scales (who were presumably those with subpar performance, given that movement within pay scales in the organization was largely merit-based). Thus, while the main effects of transparency on turnover may be inconsistent across the two studies, they are suggestive of the same general effect: pay-outcome transparency appears to sort-in the better performers and/or sort-out those with consistently poorer performance.
Finally, using data collected from two different Chinese samples, a third study by Alterman et al. (2021) examined the impact of pay-process and pay-communication transparency on employee turnover. Underlying this study was the notion that both of these transparency forms affect turnover via attributions of employer trustworthiness, with the attribution of low employer trustworthiness driving employee intentions to leave their current employer. Additionally, the authors argued that the impact of such pay transparency on attributions of trustworthiness is contingent on other justice-related signals, and particularly on impressions of the organization’s fairness in allocating rewards (i.e., distributive justice). Building on uncertainty management theory (UMT), they argued that when employees perceive greater distributive justice, pay secrecy is likely to be inversely associated with attributions of employer trustworthiness, and hence positively associated with higher turnover intentions. However, based on the certainty effect and employee tendencies to deny or dismiss what is less certain, they posited the opposite association between pay secrecy and trust attributions. That is, when employees perceive the allocation of rewards to be less fair, trust attributions are likely to be higher as a function of more restrictive pay communication policies and practices.
Using a sample of 200 managers pursuing a part-time MBA, Alterman and colleagues found the association of pay-secrecy perceptions and turnover intentions to indeed operate via employee attributions of organizational trust. Moreover, as they posited, and consistent with UMT’s emphasis on the certainty effect, employee perceptions of pay transparency were positively associated with higher levels of organizational trust (and lower turnover intentions) when employees perceived distributive justice in the organization to be high. In contrast, when distributive justice perceptions were low, individuals perceiving greater pay secrecy actually attributed greater trustworthiness to their organization than individuals who saw pay-communication policies and practices as more transparent. The heightened sense of trustworthiness was in turn associated with lower employee intentions to leave their current employer.
In a follow-up study of 200 firms, the researchers focused on the association between pay secrecy and turnover rates at the enterprise level, and the way in which the association between restrictive pay process/communication and turnover may be moderated by firm-level distributive justice climate (“shared perceptions of reward and resource distribution fairness”). Their findings indicated a positive relationship between pay secrecy and enterprise voluntary turnover rate at moderate to high levels of distributive justice climate. In contrast, at lower levels of distributive justice climate, the relationship between pay secrecy and voluntary turnover was negative (i.e., higher secrecy, lower turnover rate) but not statistically significant. Taken together, these findings are consistent with those of Belogolovsky and Bamberger (2014) and Card et al. (2012), in that they suggest that in a context where employees perceive the allocation of rewards to be fair, pay transparency (in this case, pay-process and pay-communication transparency) may be an effective means to reduce employee turnover.
Pay Transparency’s Impact on Pay Dispersion and Pay Form
A consistent theme in much of the pay-transparency research done by economists has been that pay transparency can compress the distribution of pay among organizational members, or, in other words, reduce pay dispersion. Underlying this prediction is the notion that managers, anticipating heightened employee scrutiny under conditions of greater transparency, attempt to reduce the salience of any perceived injustice, and thus limit the likelihood of employee complaints. However, pay compression may be problematic for the firm as higher-performing employees seek employment that rewards them more equitably for their differential contribution (i.e., negative sorting effects; Shaw, 2014, 2015). Several studies offer consistent support for this prediction.
In the context of a natural experiment, Mas (2017) investigated the impact of a shift to pay-outcome transparency with respect to city managers (the highest-paid municipal employees) in California. Comparing the change in managers’ pay in cities that had adopted pay-outcome transparency prior to a 2010 court mandate requiring full disclosure with the change in pay in those disclosing as result of the court decision, Mas found that disclosure led to a decline in managers’ pay of about 7% on average. The decline in wages occurred regardless of whether managers remained on the job or were replaced, which was largely explained by a pattern of reductions at the top of a pay distribution, consistent with pay compression. Moreover, the effects of this compression were highly detrimental for the municipal employers, as pay disclosure was associated with a 75% increase in voluntary turnover among city managers.
A second study, by Wong and colleagues (2021), found similar effects in private-sector enterprises in China. Moreover, consistent with the notion that transparency can be a “moving target” (Bernstein, 2017), they found that an important consequence of pay transparency was that employees colluded with managers to shift the nature of remuneration, such that differential rewards were offered in more covert forms less subject to straightforward comparison, namely i-deals. I-deals are voluntary, personalized, and particularistic agreements negotiated between employees and employers (Rousseau, 2005; Rousseau et al., 2006) that can be in the form of benefits (e.g., extra “personal days”) and developmental arrangements (personalized skill and career development programs; Hornung et al., 2008, 2009). More specifically, Wong et al. not only found a positive effect of pay transparency on pay compression, but also found that this pay compression was, in turn, positively related to both developmental and benefit i-deal requests and grants. Indeed, pay transparency was found to explain 18% of the variance in pay compression across firms, with pay compression explaining, in turn, 35% and 18% of the variance in average developmental and benefit i-deal requests, respectively.
Implications for Firm Performance
The findings reviewed up to this point suggest that pay transparency may have both positive and negative implications for firm performance. Positive effects may be expected because pay-outcome transparency has generally positive effects on individual task performance. Negative effects may be expected if, as noted in the discussion of pay dispersion, pay compression results in the negative sorting effects suggested by Mas (2017).
To date, these competing effects have yet to be directly tested. However, a field experiment by Obloj and Zenger (2017) suggested that the net effects on firm performance may be negative. These investigators conducted a field experiment in a European bank in which they manipulated rewards (in the form of monetary prizes) available to branch employees based on the branch’s performance in selling small consumer loans. More specifically, they divided the bank’s 164 outlets into four tournament conditions, with conditions varying by the value of the prizes awarded. Not surprisingly, in those branches assigned to the low-value award condition, the award had a diminished positive effect on branch performance. However, the researchers also found that branch performance actually declined as a function of the branch’s proximity or connection to branches with superior reward conditions, with the magnitude of the reduction corresponding to “how physically or socially close” the disadvantaged outlets were to the more advantaged ones. Although the researchers lacked the data to demonstrate that more proximate branches compared their rewards with one another, the inference that they drew from their study was that with transparency comes the potential for “in your face” (i.e., certain and vivid) inequity, with the resulting demoralization generating a systemwide decline in firm performance.
Studies have also investigated the societal and labor-market consequences of pay communication. These studies are important in that they focus on how pay transparency may influence gender and ethnic pay disparities, productivity, income distribution (i.e., inequality) and even employee well-being, concerns that often serve as key drivers of regulatory efforts around the world.
Gender/Ethnic Pay Disparities
Despite a concerted effort by governments in many countries, gender and ethnic/racial pay gaps remain large. For example, in the United States, the gender pay gap in 2020 was 19%, meaning that for every dollar that a man might earn in a job, a woman doing equivalent work earned just 81 cents (PayScale, 2020). Studies suggest that pay transparency can narrow this gap.
Using a novel field study design, Emilio Castilla (2015) analyzed the performance-based pre- and post-transparency reward decisions of approximately 9,000 employees in a single service organization. Prior to the introduction of transparency, women, ethnic minorities, and non-U.S.-born employees received significantly lower monetary rewards than U.S.-born, white male employees in the same job with the same manager and the same performance and human capital profiles. More specifically, prior to the adoption of transparent pay practices, growth in annual pay was 0.4% lower for women than for men, and 0.5% lower for African Americans and Hispanics relative to whites, even when controlling for unit, job, manager, and performance appraisal score. This discrepancy narrowed following the introduction of pay-process and pay-outcome transparency procedures, such that the differences were no longer significant.
Baker et al. (2019) examined the impact of public-sector salary disclosure laws, adopted at different times by Canada’s different provinces, on university faculty salaries in Canada. The study found that the adoption of such legislation reduced the wage gap between male and female faculty members by a statistically significant 2 percentage points, even when controlling for numerous employee and employer characteristics. Given that the gender pay gap was approximately 7% to begin with, this reduction represents a 30% improvement, with most of the reduction occurring as a function of increases in the pay of female faculty.
Moving from the firm and sector levels to the level of an entire economy, Bennedsen et al. (2019) adopted a novel, quasi-experimental design, drawing on matched employee–employer wage data from Denmark, which, starting in 2006, required enterprises with 35+ employees to report aggregated salary data broken down by gender, and to inform their employees of any gender-based disparities. Comparing changes in the wage gap over the subsequent years in enterprises with 35 to 50 employees versus others with 20 to 34 workers (which were exempt from the law), the researchers found that following the law’s passage, earnings of men in the non-exempt (i.e., slightly larger) enterprises grew nearly 2 percentage points less than those in the small, exempt enterprises, a difference that is statistically significant. Meanwhile, pay for women in the former increased by 0.28 percentage points relative to female employees in the smaller, exempt firms, although this difference was not statistically significant. Taken together, the findings suggest that the legislation was effective in achieving its primary objective. The wage gap in the non-exempt enterprises closed by approximately 2 percentage points more than in the exempt enterprises, or by 7% relative to the pre-law mean pay discrepancy. Furthermore, firms with larger gender-based pay discrepancies appeared to be more sensitive to the passage of the law, closing the gap more aggressively than firms with smaller discrepancies.
Productivity and Performance Implications
Bennedsen et al. (2019) also examined the potential firm-level performance consequences of pay transparency, finding mixed effects. On the one hand, relative to the exempt firms, productivity in the non-exempt enterprises declined by 2.5% following passage of the transparency law. On the other hand, this drop in productivity had no significant effect on enterprise profitability, in that the average employee wage also declined more in non-exempt firms relative to the smaller, exempt firms. Still, both of these outcomes could point to diminished competitiveness at the level of the firm, not to mention a negative externality to workers if they suffer an overall decline in pay as a result of increased transparency.
Implications for Income Distribution and Inequality
Wage distribution or dispersion refers to the spread in wages across different kinds of workers in a labor market, and in particular, the differential between the pay of those earning the most (e.g., the top 5% of wage earners in a firm, sector, or market) and those earning the least. Over the past 50 years, wages have become more dispersed in many economies around the world. In the United States, for example, in the 40 years between 1980 and 2020, the 95/10 wage ratio—which describes 95th-percentile earnings relative to 10th-percentile earnings—increased from 4.2 to 6.7. Moreover, CEO pay was about 20 times greater than that of the “median” worker in 1965, increasing to 75 times greater in 1979, 175 times greater in 2009, and 221 times greater in 2019 (Hallock, 2012, p. 18; Mishel & Wolfe, 2019). Research has also examined how extending executive pay-transparency reforms (initially enacted in the United States in the 1930s) to the broader workforce might impact income distribution more broadly.
Exploiting a 2007 decision of Norway’s tax authority to allow citizens unrestricted access to others’ tax records via the Internet, Ohlmer and Sasson (2018) examined the impact of a countrywide policy shift in pay-outcome transparency on the change in wage dispersion over time (from 2008 to 2012). Their findings indicate that the dispersion of wages in Norway fell by 0.8% within a year after implementation of the intervention. By 2012, pay dispersion had declined by 1.4%, equivalent to a total decline of 5.7% in national pay dispersion.
Obloj and Zenger (2020) examined the impact of pay-outcome transparency on the distribution of wages in a field of organizations, namely 139 colleges and universities in the United States. Their findings indicated that pay transparency had “significant and economically sizeable effects in reducing pay inequity, significantly reducing the gender pay gap, as well as more broadly improving the precision with which pay is linked to observable performance metrics and promotion” (p. 3). More specifically, in schools that adopted more transparent pay practices, they observed a shift toward greater concentration of wages around the estimated market wage, and pay variance within departments and universities fell by 20% (i.e., pay compression or, in other words, reduced wage inequality). Furthermore, they found that prior to a reduction in pay-communication restrictiveness, women were significantly more likely than men to be paid below the estimated average market wage (as well as significantly less likely to be paid over this market average), but that the gender-based differences declined significantly (though not entirely) following a transparency shift. Accordingly, Obloj and Zenger concluded that with a shift toward transparency, non-justifiable demographic factors like gender play a greatly diminished role in influencing the link between performance metrics and rewards, thus reducing wage inequities.
However, they also found that accompanying the equality-boosting effects of a transparency shift was an unintended and potentially negative consequence, namely that pay became less performance-based. More specifically, they found that pay transparency reduced the marketwide link between pay and performance in two ways. First, it made pay adjustments less sensitive to differences in measurable performance. Second, it motivated managers to “correct” pay adjustments at the lower and (sometimes) upper ends of the scale, inflating the former and attenuating the latter. In sum, while sector- or economywide pay transparency initiatives may indeed mitigate wage inequality and address demographic-based pay disparities (or inequities), they also seem to weaken the link between performance and pay, thus potentially reducing the efficiency of reward allocation.
Implications for Employee Happiness and Well-being
Finally, researchers have begun to investigate how pay transparency may affect the well-being of workers at large. In a study seeking to explain how pay transparency can have both positive and negative implications for workforce well-being, Perez-Truglia (2019)—like Nachlieli-SimanTov and Bamberger (2021)—posited that the nature of the effect depends largely on one’s position relative to one’s frame of reference. Focusing on happiness and life satisfaction, two important indicators of subjective well-being that are highly correlated with objective well-being measures, Perez-Truglia tested this wealth-contingent hypothesis using data from Norway before and after that country’s 2001 decision to make individuals’ income tax data accessible to the public via the Internet. His findings indicate that the income transparency change led to a 29% increase in the association between income and happiness, and a 21% increase in income’s association with life satisfaction. That is, while income had always been positively associated with happiness and life satisfaction, when individuals could easily compare their income with that of others, happiness and life satisfaction became more income contingent. Moreover, while prior to the shift in income transparency there was no year-by-year change in the income–happiness association, there was a distinct change following the adoption of Internet accessibility.
However, these transparency-related boosts in the impact of income on emotional well-being were not consistent across all those studied. The transparency reform was associated with a large and sustained increase in the income–happiness gradient only for wealthier individuals. For poorer individuals, the impact of income on well-being remained unchanged (with anecdotal evidence suggesting certain dysfunctional effects). Accordingly, Perez-Truglia’s findings suggest that while more transparent pay information may improve the emotional well-being of those earning more in a labor market, it offers little psychological benefit (and perhaps even emotional harm) to those earning less.
Conclusion and Directions for Future Research
Pay transparency has been a contentious issue for more than a century. On the one hand, proponents argue that greater transparency is more consistent with the ethical underpinnings of liberal, humanistic societies and is likely to benefit employees, employers, and/or society at large. On the other hand, opponents highlight the ethical challenges that transparency may pose to personal privacy rights, as well as its potential social, psychological, and economic risks for employees, employers, and/or society at large.
Table 1 summarizes the key research findings, highlighting the evidence underlying the divergent opinions. Although there are clear and consistent findings regarding the implications of certain forms of pay transparency for specific outcomes, across the range of outcomes and criteria examined, for each of the three dimensions of pay transparency, the evidence remains either equivocal or limited. More specifically, Table 1 shows that while there is extensive research on the consequences of pay-outcome transparency, there is no evidence of a clear and universal positive effect. Instead, the effects vary by dependent variable (e.g., they are positive for task performance, negative for contextual performance) and are contingent upon a variety of conditioning factors, such as individual differences (e.g., prosocial motivation), employee perceptions (e.g., justice perceptions), and unit/enterprise climate (e.g., fairness climate). In this sense, the findings suggest that while the adoption of more pay-outcome transparency is likely to benefit the interests of a particular set of stakeholders (e.g., workers, employers, women, minorities) along some set of parameters of particular concern to them, the same practices are likely to have adverse effects with respect to a different set of parameters of primary concern to other stakeholders. In contrast, although the empirical evidence is far more limited, there appear to be only largely beneficial implications for both employees and employers with regard to the pay-process and pay-communication forms of transparency.
Table 1. Summary of Implications of Pay Transparency at Employee, Enterprise, and Societal Levels
Advantages of Pay Transparency (vs. Secrecy)
Disadvantages of Pay Transparency (vs. Secrecy)
Enterprise & Society
Enterprise & Society
Heightened levels of pay, promotion, and work-related satisfaction (Futrell & Jenkins, 1978)
Positive effect on distributive justice perceptions among
the more equity-sensitive (Bamberger & Belogolovsky, 2010)
and those paid more than comparative peers (SimanTov-Nachlieli & Bamberger, 2021)
Heightened employee perception of employer trustworthiness among those perceiving greater distributive justice
Lower frequency of counterproductive work behavior among those at higher end of pay ranges (SimanTov-Nachlieli & Bamberger, 2021)
Reduced rates of employee turnover, but only in contexts characterized by high distributive justice climate (Alterman et al., 2021)
Enhanced psychological well-being of those earning more in society (Perez-Truglia, 2019)
For those paid less than comparative peers, transparency is associated with lower distributive justice perceptions than with pay secrecy (SimanTov-Nachlieli & Bamberger, 2021)
Among those with more collectivist values, transparency is positively associated with envy
Lower employee perception of employer trustworthiness among those perceiving less distributive justice
Negative sorting effects among city managers (Mas, 2017)
Diminished unit performance (Obloj & Zenger, 2017)
Diminished firm productivity (Bennedsen et al., 2019)
Lower frequency of counterproductive work behavior directed against the organization and individuals (SimanTov-Nachlieli & Bamberger, 2021)
Heightened levels of organizational citizenship behavior (Marasi et al., 2018)
Further research is needed to broaden our understanding of the implications of alternative pay-communication practices and enhanced employee pay knowledge, as well as the contingencies governing such effects. In particular, research is needed to help us better understand how policies mandating or encouraging any of the three forms of pay transparency examined—pay-process, pay-communication, and pay-outcome transparency—affect wages. Under what conditions might they indeed spur labor market competition, or at least improve employer compliance with mandated employment standards, such as minimum wage and overtime payments? In contrast, are there situations or contexts in which pay transparency might facilitate implicit labor-market collusion by employers (i.e., reinforcement of monopsony), or—as suggested by Cullen and Pakzad-Hurson (2019)—restrict workers’ bargaining power, both of which might in fact reduce labor market competition? Studies are also needed to try to resolve the equivocal findings regarding the consequences of pay-outcome transparency. The findings shown in Table 1 suggest that, across a range of outcomes, the beneficial versus adverse consequences of pay-outcome transparency may be contingent upon the individual’s pay relative to comparison others (i.e., beneficial for those whose pay is higher than that of comparison others, and adverse for those whose pay is lower). Still, the evidence is only partial, and more research is needed to determine if this is indeed the common and determining contingency factor across outcomes.
Studies are also needed to examine the net effects of various forms of pay transparency on the performance of work units or firms. As noted in the discussion of individual-level behavioral effects, while there is growing evidence for how various forms of pay transparency affect outcomes theoretically linked to firm performance (e.g., individual task performance, employee turnover, collaborative behavior, counterproductive work behavior), these findings present a mixed bag, with some suggesting beneficial effects, and others suggesting largely detrimental effects. Unfortunately, research has yet to examine the total, net effect. Also at the level of the firm, there is no understanding of what prompts organizations to adopt more-or-less restrictive pay policies and practices. Institutional forces, such as government regulation, may explain some of the variance, but the impact of other factors (e.g., business model, founder ideology) remains largely unknown.
Finally, at the micro or individual level of analysis, little is known about the cognitive implications of pay transparency and pay information. In particular, research is needed to help us better understand how pay information might activate the expression of underlying personality traits and affect human cognitive processing. In terms of the former, Fulmer and Shaw’s (2018) compensation activation theory offers a comprehensive and systematic framework for understanding how pay information might affect employee behavior via the activation of otherwise latent behavioral tendencies. However, this theory has not yet received empirical testing. In terms of pay transparency’s impact on human cognitive processing, research suggests that affective stimuli have robust effects on individuals’ executive function, influencing working memory, processing speed, attention to deal, and cognitive flexibility (Riskin et al., 2020). Accordingly, it is reasonable to conjecture that these mechanisms may also have an impact on employees’ cognitive functioning, including basic processes at the core of task performance. What we don’t know is the nature, magnitude, and temporal latency of such effects.
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