Does Pay Transparency Backfire?

Does Pay Transparency Backfire?

“Widely publicizing pay,” strategy professor Todd Zenger argues at the Harvard Business Review, “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.” As a result, it “unveils more than real gender-based inequities; it also fuels perceived inequities prompted by inflated self-perceptions.” So employees receiving salaries commensurate with their value to the organization feel underpaid relative to their higher-paid colleagues, which de-motivates them and makes them less productive, more likely to quit, and more likely to agitate for changes to the organization’s rewards policy:

For many years, Harvard managed the bulk of its endowment portfolio with internal Harvard employees but paid them much like fund managers employed by external investment management firms. The performance of these Harvard employees was quite remarkable during the early 2000s. As a result, some of these Harvard employees earned in excess of $30 million in yearly pay, due to performance that was truly exceptional against industry benchmarks. Their superior performance earned billions for Harvard, and all was fine until these pay outcomes became transparent to the Harvard community. This transparency set off a wave of opposition from students, faculty, and alumni alike. All efforts to justify these rewards, based on claims that payments to outside fund managers for such exceptional results would have been greater, fell on deaf ears. Harvard’s president at the time, Larry Summers, relented and flattened pay, pushing several fund managers to leave. Harvard also moved the management of a much larger share of the endowment to external fund managers, including many who had just departed Harvard. Transparency prompted lobbying for change.

Employers’ responses to these perceptions, Zenger adds, don’t tend to help employees: whether flattening pay, isolate employees with different pay patterns, or outsource those roles where pay diverges dramatically, as Harvard and other organizations have done:

For years, large pharmaceutical firms purchased small biotech firms with promises to keep their “entrepreneurial rewards” intact. But the large firms quickly discovered that social comparison processes made this highly problematic. Attempts to maintain these incentives wreaked havoc on the sense of fairness and equity in the remainder of the firm. Yet abandoning these incentives caused key talent — the talent that prompted the big company’s acquisition in the first place — to exit. Big Pharma quickly moved to a model of contracting out research to smaller firms, and then paying to license any discoveries. Of course, the story with Harvard and the management of its endowment echoes this same pattern. Pay transparency pushed Harvard to outsource.

We’ve also looked at criticism of pay transparency from the perspective of closing the gender pay gap, connecting it to the debate over whether to remove questions of salary history from the hiring and pay negotiation process: If it helps her negotiate a fairer salary, these critics argue, a candidate should have a right to keep her pay a secret from her prospective employer.

On the other hand, pay transparency is coming whether or not employers choose to implement it—In the age of Glassdoor and Payscale, there are many ways for employees to find out what their colleagues earn or what their market value is—so rather than fight the transparency trend, many organizations are trying to get ahead of it. (And CEB Total Rewards Leadership Council members can read more about how to do that here.)