The science of pay transparency

There is a revolution stirring. It’s taking shape in offices, around dinner tables and in newspaper headlines around the UK: people are talking about how much they earn. Keeping a polite silence around money is such a long-standing cliché of what it means to be British that for some, simply having these conversations cuts to the core of how we think of ourselves and our society.

On 5 March this year, almost 250 staff of the BBC – British by name, but no longer it seems by nature, in this respect at least – signed an open letter to the director general Tony Hall, demanding “full pay transparency”. This followed a review of the broadcaster’s pay last summer which found that only one-third of the 96 best-paid employees were women, none of whom were in the top seven. Then in April, large firms and public bodies were required to publish figures comparing men and women’s average pay, revealing that 78 per cent of them pay men more.

The BBC staff who signed the letter demanding pay transparency argue that it constitutes the “fastest, cheapest and fairest way to begin to tackle unequal pay,” and that it is the most effective way to uncover pay discrimination due to race, gender, age or class. The CEOs of those companies that have adopted the policy – so far low in number but high in enthusiasm – believe it is an improvement on the way we have always done things. But what is the evidence? Given we have laboured (quite literally) under pay secrecy for so long, what would such a dramatic shift do to our minds?

Despite its longevity, there have been some experiments suggesting that pay secrecy may be the worst possible policy we could have in the workplace, for both employers and employees. In one study by Elena Belogolovsky at Cornell University and Peter Bamberger at Tel Aviv University, participants were divided into groups of four and asked to perform a task on a computer. After each round, one set of groups saw a bar chart on the screen showing only the amount they as an individual would be paid for their performance, and they were forbidden from discussing their remuneration with others in their group over the monitored email system – mimicking pay secrecy conditions.Those in the second set of groups, working under pay transparency conditions, also saw a second bar chart showing their reward relative to other participants, and were told their email communications had no restrictions. After three rounds, the researchers found that those in the pay secrecy group performed worse and would be less willing to come back.

Further studies by Belogolovsky and Bamberger found that employees collaborate more effectively under transparent conditions, as they are better at assessing the best colleague to approach for advice, based on knowledge of their salaries. Belogolovsky says: “In pay-for-performance systems, pay secrecy has a negative impact on individual task performance and retention because it weakens the perception that an increase in performance will befollowed by increase in pay.”

The evidence seems clear: secrecy obstructs productivity. But what happens in a real workplace? Here, the case for transparency grows more opaque.

Potential drawbacks

Researchers Jordi Blanes i Vidal and Mareike Nossol at the London School of Economics sought to answer this question using data from a German wholesale and retail firm which began informing its employees how they were paid, and how productive they were, relative to their colleagues. As a result, productivity improved by 6.8 per cent.

But when David Card, professor of economics at the University of California, performed an experiment on other staff at his university, the results were not so positive. Randomly chosen staff members were sent a link to a website set up by a local newspaper which listed the salary of all state employees, including those working for UC – with no information about productivity levels – and then surveyed them about their pay, job satisfaction and job search intentions.

Unsurprisingly, he found that workers who were paid below the median in their department felt less satisfied in their job and intended to look for another. But those who were paid above the median did not report any significant improvement in job satisfaction or shifts in their intention to move. The negative impact of pay transparency among those who earned less was not off-set by the positive impact among those who earn more, and that means, according to Card, “employers have an incentive to maintain pay secrecy.” Little wonder it has been the norm for so long.

Joel Gascoigne, CEO of the social media management platform Buffer, believes the incentives for pay transparency are far greater. He is committed to what he calls “radical transparency”, publishing not just the salaries of all his employees but also revenue data and details of diversity of his employees.

“When we moved to pay transparency within the company, most of our concerns were around the uncertainties of what might happen,” he explains. “It is still a very uncommon practice, sothere were almost no resources to look at or people to advise us. But we found that all of these concerns were unfounded and hypothetical, and that the massive benefits far outweighed challenges – there was an immediate growth in the level of trust among team members, and the overall sentiment was very positive. Knowing how much everyone else was making, knowing the formula used and seeing it was fair was comforting for people.”

When the salaries were published online for the general public, it was not quite so straightforward, he explains. “That was a little more psychologically challenging, and we had more conversations and discussions about it. There were some fears that people had around what may happen once their salary is public for the world to see and know. Today at Buffer, internal pay transparency is incredibly important and something we don’t deviate from. But when it comes to public transparency, we now allow team members to opt out, for example, if there are personal safety concerns.”

It’s not easy, he adds, but it’s worth it: “Pay transparency, like many other forms of transparency, requires extra work. It takes time to create a clear and fair compensation system, and it requires maintenance and expansion over time (we’ve had several iterations of our formula). Arguably the company could move faster on certain initiatives, and perhaps even have higher growth, at least in the short term, if we didn’t hold ourselves to the level of transparency we do. However, when you take a long-term mindset, it is a very easy decision to put in the effort. It breeds trust by removing any ability to use control of data to hold power, and by opening up all the information for anyone to question. It enables innovation by ensuring that the whole team has all the information at their disposal to make key decisions – usually only top level executives have all the cards. It leads to fairness and greater justice by inviting any team member and the greater public to question or call us out on our compensation system.”

After Gascoigne took the decision to go transparent, he reported a huge increase in the number and quality of applicants to Buffer. This is key, says Sir Cary Cooper, professor of organisational psychology and health at Manchester Business School: simply telling people what they are paid in relation to their colleagues is not enough. It has to lead to something more. Asked if pay transparency is, psychologically speaking, a good thing, he heaves a big sigh.

“I think it would be a good thing if the transparency also led to openness,” he says. “If the organisation had managers who were open to people coming to them to do discuss, openly, their own value and worth and fairness. If they have that kind of culture, I think it could work. If they don’t, then I think it might cause conflict and problems.”

For Belogolovsky, too, transparency in itself can only be part of the solution: “I believe that the real issue is not whether pay should be transparent or not but rather whether the compensation system is equitable, well managed and well communicated. Neither a transparent pay policy where employees can compare salaries nor pay secrecy is a solution for an unfair system. In practice, however, at least some degree of pay transparency is necessary in order to convince employees that the organisation’s compensation system is equitable and fair.”

Emotional impact

The less fashionable, arguably more realistic approach to this question is to recognise the true impact that revealing this kind of information might have. Robyn Vesey from Tavistock Consulting says we need to think about how an organisation’s systems and structures can affect its employees psychologically, and the impact our unconscious motivations and processes have on our work and our colleagues. The question of who gets paid what in relation to whom brings up extremely complex feelings, she says: “It’s about numbers and it’s about more than numbers. Who deserves what is such a key anxiety of our age, whether you’re talking about claiming benefits or pay in high level jobs.”

She suggests one benefit of organisations keeping salaries secret is that it helps to manage anxieties that accompany feelings around recognition. “Pay is very charged, in that it’s linked to these sorts of emotions. There are ways in which the current system works to keep in place some aspects of competition and of rivalry across all employees, to contain some of the strong feelings people might have about their remuneration,” she says.

This might sound like a counter-intuitive approach – but that is why it is so important to reflect on it, Vesey explains. “In our age, we don’t often consider the flipside of having more information. At a psychological level, there is always a consequence of sharing information that is irrational as well as rational, and that balances the assumption that the impact is always positive.”

That is why hailing transparency as some kind of cure-all must be overly simplistic. Because although debate around transparency and the gender pay gap might appear to be economic, it is also profoundly psychological; it is about being and feeling valued.

“This is the thing about pay transparency,” Cooper tells me, “It’s about what it says to you as the individual employee about whether they value you or not. It’s about more than the money.” If we think of the concept of value as the intersection of psychology and finance, it is clear that while transparency might shine a light on the problem, sharing information will not solve it: employers need to put their money where their mind is.

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