Pay secrecy could soon be a thing of the past

The policy of complete pay transparency is a huge departure from accepted motivational structure, but some companies are starting to consider what the benefits of opening up incentive schemes might be

 
Author: Matt Timms
April 22, 2014

While the concept of transparency has entered the management mindset in recent times, the idea of full pay disclosure has been largely sidestepped at corporate level, where managers have generally been backed up by academia and psychological research in their decision to keep pay secret.

Various studies have found that employers are right to impose pay privacy rules, and that a more open system could disincentivise workers and impact productivity. Put simply, pay transparency can breed jealousy, resentment and even rivalry, especially in a world where wage discrepancies are common and inequality a fact of corporate life.

As it stands, pay is by-and-large known only to employers and left to the discretion of workers as to whether or not they wish to disclose their private information. It’s a state-of-affairs that allows employers to skirt responsibility for conflict in the workplace, and one that, some would say, protects employees from demotivation on their discovering vast wage differentials between themselves and co-workers. However, it’s also one that many claim is widening the income inequality gap.

A recent study, carried out by the Institute for Women’s Policy Research (IWPR), shows that, of a sample of 2,700 companies, discussions of pay are either prohibited or discouraged in the workplace. Of the respondents, 19 percent said that discussions of wage were formally banned in the workplace; a further 31 percent claimed that disclosing salary information was discouraged by management.

Many executives are quick to argue that the challenges of keeping employees content are demanding enough, without the uncertain complications that come with pay transparency. What’s more, the vast majority of senior management and executives will have journeyed to the top with their experience of the workplace being that openly discussing pay is frowned upon, if not formally banned.

The Buffer formula for fair pay

Salary = job type x experience + location (+$10k if salary choice)

1. Job type = base

  • Happiness hero = $45,000
  • Happiness engineer = $52,500
  • Engineer = $60,000
  • Founders = $80,000
  • Non-founder c-level = $20,000

2. Experience = multiplier 

  • Master: 1.3x
  • Advanced: 1.2x
  • Intermediate: 1.1x
  • Junior: 1x

3. Location = additional

  • A: +$22,000 (e.g. San Francisco, Hong Kong, Sydney, London, Paris, New York)
  • B: +$12,000 (e.g. Nashville, Birmingham, Vienna, Austin, Vegas, Tel Aviv)
  • C: +$6,000 (e.g. Estonia, Poland, Romania, Chile)
  • D: +$0 (e.g. Philippines, India, Vietnam)

4. Equity/salary choice

  • You get a choice of more equity or more salary. If you choose salary, you get +$10,000

Having said that, there exists a growing body of work that shows pay transparency to be a far superior style of management to that of secrecy. And whereas disclosing employee wages could demotivate workers who feel they’re grossly underappreciated and underpaid, the alternative line of thinking is that they would actually be motivated by a policy of openness and transparency.

Millennial change
A new study carried out by Elena Belogolovsky of Cornell University and Peter Bamberger of Tel Aviv University ponders the supposed damages of pay secrecy on performance, and comes to the conclusion that increased transparency could hold the key to improved productivity.

“Many managers believe that pay secrecy is better because it avoids the implications if one employee finds out that a co-worker makes more than him/her,” reads the report. “However, many up-and-coming Generation Y employees have grown up in the public world of social media and have no issues sharing information with one another that used to be seen as private – such as pay.”

The compensation advisory service KnowledgePay also suggests that improving communication with regards to pay, far from disincentivising employees, can result in a more committed, engaged workforce. “Organisations have to face it,” says the company’s founder and Chief Executive Chris Kelley; “compensation is no longer a secret.”

The wider issue here is not one of pay in itself, but one of transparency, and it’s no coincidence that a company’s commitment to transparency on a holistic scale often bears a strong correlation to where it falls on the pay disclosure continuum. The fundamental problem with secrecy, it is argued, is that it has a tendency to spread to other facets of the business and ultimately breed mistrust both inside and outside the company in question.

Uncovering unfairness
“Complete transparency is hugely beneficial and well worth the cost,” says Dane Atkinson of SumAll.com, an emerging data organisation company and one that itself practices full pay disclosure. “It fosters a meritocracy where effort is more fairly compensated. It removes the politics of subject compensation and assures those that don’t negotiate a fair wage. It prevents discrimination and abuses. Most fear it, and in many cases, those who fear it have reason to. Those employees may stand to lose compensation.”

Many argue that the longstanding reluctance of businesses to make employee pay public actually perpetuates income inequality – the belief among employees that they are not remunerated fairly among co-workers. Transparent pay, on the other hand, boosts competitiveness and places far greater pressure on companies to impose pay equality, as can be seen in the case of public organisations, which are forced to report pay structures. And although pay transparency falls far short of a solution in itself, it’s likely to stop higher earners pulling away from the lower earners by quite as much as they are doing at present.

“After all, how can you know you are being discriminated against if you can’t discuss your pay?” says Linda Barrington, Executive Director of the Institute for Compensation Studies at Cornell University.

The issue of pay transparency, however, need not necessarily apply to full disclosure, but rather to how explicit a company is in specifying how an employee can progress through the ranks and earn a raise. Regardless of a business’ disclosure policy, the process, system and criteria for earning a raise or promotion should be clearly laid out for all to see and understand, so as to protect against unequal standards and confusion among employees.

Control or trust?
Regardless of whether or not pay transparency is believed to be the best style of management, imposing the system on a company that has previously abided by one of secrecy could quite easily result in any number of problems. Removing the notion that pay should remain hidden from view is an incredibly alien concept to some, considering that many companies, if they were to embrace pay transparency, would be exchanging total control for employee trust.

The solution to income inequality is not to focus on full disclosure alone, but instead on improving transparency and fairness across the board

“Transparency leads to trust,” says Daniel Tenner, Director of Grant Tree, a company that specialises in securing government funding for young technology companies. “If your employee doesn’t have the information to make a decision, you can’t trust them to make that decision. Conversely, if everyone has all the information, and you’ve hired smart people, they will usually make the right decision. Transparency effectively means that you treat your employees like adults who can handle the truth, rather than children who must receive a filtered version of reality.”

Another organisation to have adopted total pay transparency is the social media start-up Buffer, which has cleverly devised a formula (see boxout) for fairly designating pay to each of its employees so as to better avoid potential conflict. The company’s system sets a standard base pay in accordance with one of five levels, and factors in multipliers based on experience, location and equity.

“Transparency breeds trust, and that’s one of the key reasons for us to place such a high importance on it. Open salaries are a step towards the ultimate goal of Buffer being a completely open company,” says the company’s CEO Joel Gascoigne.

This suggests that the concept of total pay transparency is more easily applied to start-ups and smaller enterprises, whose relatively simple structures can better take on board what at first glance appears a revolutionary series of changes. For larger businesses that have for some time practiced quite the opposite, the key to instigating greater pay transparency may lie instead with a policy of partial openness.

Culture of openness
Although the idea of pay transparency has come to be looked upon more favourably in recent years, those who consider it as a viable option remain in the minority. Most are entirely unconvinced of its ability to breed a culture of openness and see it instead as a cause for discontent among employees.

As can be seen in Belogolovsky and Bamberger’s report, the solution to income inequality is not to focus on full disclosure alone, but instead on improving transparency and fairness across the board.

“The solution is not to make pay systems completely open, but to make them more transparent and fair, and communicate clearly about them. Employees need to understand how to get from point A in a salary range to point B. It’s also important to make sure that employees perceive the system as fair – it doesn’t matter what you think. If your employees don’t perceive it as fair, you’re in trouble.”