Here’s how pay transparency affects the workplace

How would you feel if your co-workers knew exactly how much you earned?

For some, the idea is uncomfortable and stressful. For others, like younger people and staffers at companies that already practice pay transparency, it might feel like a natural step toward a more just workplace. The logic of making compensation transparent is that it becomes harder to pay people unfairly when salaries are open to public scrutiny.

A new study supports this argument with data.

Tomasz Obloj of HEC Paris and Todd Zenger from the University of Utah’s business school compiled the salaries of almost 100,000 US-based academics in eight states over a period of 14 years. Their findings, set to be published in the journal Nature Human Behaviour later this year, show that pay transparency (which schools in some states practice as a matter of course) had a big effect on both pay equity—how fairly the academics were paid, particularly in regards to gender—and on pay equality—how similarly the academics were paid compared with their peers.

Not surprisingly, once wages and rewards become transparent, there is both internal and external pressure to close those gaps, Obloj observed.

But the extent to which making pay transparent helps erase unfairness was remarkable, he said. The gender pay gap, for example, was reduced by up to 45% in transparent organizations compared to those in the study that didn’t disclose such data.

Inequality of pay also dropped by about 20%, Obloj said, noting that pay transparency leads to what he called overall “wage compression,” whereby all the salaries in a given organization become more similar, with fewer outliers.

Obloj and Zenger came up with a third finding that could also hold lessons for companies exploring pay transparency: When salaries were made public across organizations, the link between pay and performance was significantly weakened, by about 40%, meaning—in this case—that higher academic salaries were less closely tied to observable metrics like publications, grants, patents, or books.

The authors also noted that while work achievements were rewarded less highly in transparent companies, the link between achievement and pay was actually more clear and data driven in transparent companies than in their non-transparent counterparts.

The question that now fascinates Obloj is whether that change in the relationship between higher pay and achievement at work is a good or a bad thing.

On one hand, companies might argue, offering pay incentives is crucial to attract and retain talent, a practice which results in people being paid very differently from one another. An organization could lose “superstars” if it couldn’t offer them much more money than other employers, Obloj said.

On the flipside, there’s an argument to be made that paying people based on performance is itself discriminatory.

For example: Academics might be given a “bump” in pay for every journal article they publish, but if most journal editors are male, and the review process tends to give preference to articles by male authors, then the performance-related reward is already structurally more likely to go to men, he explained.

Add to this the fact that female academics tend to be paid less even at entry level, which the study authors also documented, and any performance-related pay raises will only exacerbate existing unfairness. The same could well be true for other groups that don’t have the structural support (be it child care, home help, or something else) to make work achievements at the same rate as more privileged colleagues.

Could there be other benefits to decoupling performance and pay? There really might be, Obloj suggested.

His and Zenger’s next piece of research is on collaboration, and early results suggest that in organizations where pay transparency is in place, collaborations tend to be deeper and more fruitful. Productivity, meanwhile, does not appear to drop overall at places with transparent pay.

“People start collaborating more in environments where wages are more similar, and there’s less social comparison both upward and downward, meaning less envy and compassion,” Obloj said.