There are very few talent-related issues that generate as much attention as compensation—in particular, how compensation compares among all the various employees at an organization. Historically, companies have preferred not to share information about compensation out of fear that those who are on the bottom half of the compensation chart will become disappointed and disengaged when they learn that they are earning less than their colleagues. This fear has been a major factor in the business community’s objection to the CEO-employee pay ratio reporting rule that came into force in the US this year: When you publish the salary of the median employee, half your employees inevitably discover that their pay is “below average.”
This idea of hiding compensation for fear of disengaging employees is a relic of the past, however. The reality today is that employees can get a sense of how their compensation stacks up compared to their peers through a growing number of websites that share this information publicly, such as Glassdoor, PayScale, or Salary.com. In other words, employees can already find out how their compensation compares to others and are already talking about it; the question for senior leaders is whether they want to participate in or shape these discussions.
As technology has forced greater transparency in compensation, some companies have decided to actively manage the conversation by proactively revealing to their employees what their co-workers, managers, and senior leaders earn. The New York-based tech company Fog Creek Software is one such organization; eight months ago, it gave its three dozen employees a chance to see what their peers were making. On Bloomberg’s “The Pay Check” podcast this week, Rebecca Greenfield checks in with Fog Creek to see how it went:
Fog Creek’s chief executive officer, Anil Dash, believed … that salary transparency would shine a light on unfair pay practices and ensure things stayed that way. Dash, an entrepreneur, prominent tech blogger and prolific tweeter, is a rare, pro-union, tech CEO who also believes in the old-guard internet principle that information wants to be free. “Transparency is not a cure-all and it’s not the end goal, it’s a step on the way to the goal, which is to be fair in how we compensate everyone,” Dash said. …
The topic of pay transparency remains controversial and even divisive in the business world, with proponents arguing that it forces employers to set compensation more fairly and rationally, and can help close pay gaps for women and other historically underpaid cohorts. Critics of pay transparency, on the other hand, doubt that it is an appropriate tool for closing these gaps and warn that it will tend to backfire when employees find out they’re earning less than their peers, and less than they think they should. In a recent article at Fast Company, Pavithra Mohan hears from leaders at several organizations that have adopted pay transparency practices about how the experience has played out. One such company is Crowdfunder, which introduced salary transparency in an effort to close pay gaps:
Still, not all employees responded favorably when Crowdfunder started publicizing salaries. Employees who were underpaid received raises and were “instantly gracious,” according to [company president Steven] McClurg, but “it was the people that were overpaid that were like, ‘Well, why don’t we get raises too?’” Their argument, he says, was essentially, “We’ve been here just as long as these people have; we perform. Just because we negotiated a higher pay coming in and we constantly negotiate our pay doesn’t mean that we should suffer.”
It may come as little surprise that most of these employees were men, McClurg reports, and that most have since left Crowdfunder. This is a common critique—that salary transparency can lead to a lot of employees “lobbying for change,” including where it isn’t warranted. Employees who think they’re underpaid may feel dissatisfied and leave the company as a result.
On the other hand, Mohan notes, “If the cost of offering a fairer shake to women and people of color is employee attrition elsewhere, some employers still see it as a net gain”:
Numerous tools and websites have emerged in recent years that have given employees increased access to compensation data (such as Glassdoor, Payscale, and Salary.com, to name a few). This increased transparency has fundamentally changed how employees, managers, and employers need to think about compensation conversations. Many employers are now actively debating whether to become more transparent about compensation, and some may feel like they have no good options. Publicizing what everyone in the company earns, after all, can be a blow to morale when employees find out their peers make much more than they do but don’t understand why.
On the other hand, keeping pay information under wraps looks increasingly like a losing battle, and may harm performance in a different way: A recent study highlighted at the Association for Psychological Science found a correlation between pay secrecy and a deterioration in team communication and performance:
In [Cornell University professor Elena] Belogolovsky and colleagues’ new study, 146 business students at a Singaporean university were told they would be solving a series of puzzles for cash prizes. … The students were told they could earn up to 8 Singapore dollars (around $6 US dollars) per round over 6 rounds depending on both their individual performance relative to the other members of their team and whether they were a “team player.”
In the secrecy condition, the students’ score was displayed along with their cash payment for that round. In the transparency condition, their score was shown along with a bar graph displaying their pay relative to that of their team members. Throughout the experiment, confederates followed a pre-scripted schedule of requests for help, and the speed and quality of their helpful responses were also pre-scripted. The results suggest that pay transparency encouraged participants to go to the most skilled individuals for help. When pay was secret, participants had no way to accurately judge their colleagues’ expertise and were less likely to turn to the most qualified “expert” teammate for help.
One of the big lessons that came out of CEB’s Women in Leadership scoping calls was the idea that to make diversity initiatives stick you need participation from all groups of the company. It’s a fine balance between inclusivity and recognizing the needs of historically excluded groups. Many advocates of diversity have recently begun thinking along the same lines, reframing diversity as a global good. For example, take this argument from Sava Berhané at Fast Company that diversity initiatives today should focus on showing how they benefit everyone, to make the challenge of gender equality more than just a “women’s issue”:
Let’s face it. Contemporary workplace culture often associates stereotypically masculine attributes with success. … Until we can break through those biases—among women as well as men—top-down, women’s-only efforts are doomed to fail. Instead, let’s start rethinking what constitutes effective leadership itself. Sure, one way to go about this is to ask for more women leaders. But another way is to support effective male leaders who don’t have conventionally masculine leadership traits. After all, the data suggests it’s both men and women who need to include more stereotypically feminine qualities in their visions of leadership.
Berhané’s overall message is very similar to what we published in Women in Leadership: Companies should make this about business outcomes, not just diversity. These arguments are not exactly new, but to see them featured in Fast Company indicates that this “new wave” of diversity thinking is becoming more and more mainstream. Compare what director and screenwriter Ava DuVernay had to say about the word “diversity” at the Elle Women in Hollywood awards last month: