Why pay transparency is a double-edged sword

How comfortable would you be knowing how much a colleague – who does the same work as you – earns each year? How would you feel if you found your remuneration was considerably less? Now imagine you had a say in how much remuneration your colleague received.

It’s not that far-fetched. In late 2018, travel insurance company Squaremouth made international headlines, thanks to reports by CNN and Business Insider, about its unique approach to pay reviews. Since its inception in 2003, Squaremouth has used a policy of peer-reviewed raises. This means that if employees think they deserve a raise, they have to bring it before their co-workers at a company-wide meeting.

CNN reported that co-workers voting for their colleague have until the end of the day to make a decision and must provide a reasonable explanation for their vote. If a majority of the company votes in favour of the raise, it gets approved.

Notably, none of the votes are anonymous, and each employee’s salary is posted internally.

It’s this very transparency that CEO Chris Harvey believes makes the process work. “There is no stopgap,” he told CNN. “We rely on everyone having enough information and being intelligent enough that they will vote for an acceptable raise.”

This “uber transparency” appears to work for Squaremouth employees. CNN reported that 39 out of 41 pay increases since 2010 were approved.

However, pay transparency remains a divisive issue and there are pros and cons associated with this approach. It has been described as a “double-edged sword”.

Pay transparency advocates say…

• It can reduce pay discrimination. As the argument goes, if everyone knows everyone else’s pay level, patterns of discrimination or bias can easily be seen, resulting in pressure to improve. This could be particularly useful for bridging the gender pay gap.
• Secrecy breeds gossip and mistrust. Pay becomes a water-cooler distraction, talked about and debated behind the scenes – but ultimately it’s wasteful and can contribute to a toxic culture. Afterall, the more an organisation defends its right to withhold information, the more suspicion festers and the more damage is done to reputation. Transparency cuts out the white noise.
• If employees are aware of the link between pay and performance, pay transparency can result in higher individual performance; they may mimic those who are designated as high performers.
• Engagement can be enhanced. One study[1] revealed that one of the top predictors of employee sentiment, including “satisfaction” and “intent to leave”, was a company’s ability to communicate clearly about compensation. Open and honest discussion around pay has been found to be more important than typical measures of employee engagement, such as career advancement opportunities and employer appreciation. Dave Smith, Chief Product Officer at PayScale, suggests: “Pay is a crucial component of engagement because it’s not just a number; it’s an emotional measure reflecting how valued an employee feels by their employer.”

Pay transparency critics say…

• Varying levels of experience and skill sets make for an “apples and oranges” comparison between employees, even when they are doing similar work or share job descriptions. Time with the company, industry experience, performance, areas of specialty, additional training received – there are many reasons why salaries for the same jobs vary within the same organisation.
• An obsession with pay can cultivate an “inflated self-perception” among employees, in addition to becoming a costly agent for change for employers, according to Todd Zenger, a professor at University of Utah’s Eccles School of Business.[2] Zenger says that in most work environments, individual performance is not easily assessed, in part because performance is a joint product that reflect both our own effort and that of many others. This appears to give us wide latitude to exaggerate our performance and our contributions to the organisation. Invariably, Zenger suggests, this breeds discontent because current pay is usually well below where the individual thinks it should be.
• Culture and performance metrics can suffer. If workers are unhappy about their pay, their productivity may drop. Employees may also turn on each other if they feel some people are getting more than others feel they deserve.

Meet in the middle?

It seems the best approach might borrow elements of both the pro- and con- transparency debate. PayScale’s study suggested that people feel more positive about work when their organisation communicates clearly about compensation – for example, by explaining to an employee why they’re paid lower than market rate.

A Business Insider article[3] quoted Elena Belogolovsky, who was an Assistant of Human Resources Studies at Cornell University: “You don’t have to disclose [salary] information for every single person in the company. But what you need to do is make the system more transparent. You need to provide people with information on what they can do to make more.”

Pivot Software, a specialist remuneration software provider servicing the Australian and New Zealand markets for over 16 years, is now a part of  ELMO Software.

Designed, sold and supported by local HR experts, Remuneration is a best-in-class solution to help you manage the critical business process of pay reviews, which impacts employee engagement and organisational performance. Remuneration is designed for organisations with straight-forward or complex remuneration requirements and provides better visibility of the entire process by identifying bottlenecks and providing clarity around remuneration decisions against budgets. For further information, contact us.

[1] https://hbr.org/2015/10/most-people-have-no-idea-whether-theyre-paid-fairly

[2] https://hbr.org/2016/09/the-case-against-pay-transparency

[3] https://www.businessinsider.com.au/pay-transparency-study-boss-salary-2018-11