Is pay transparency worth it? A look at the pros and cons

Pay transparency has long been touted as the answer to closing the pay gap, but could it do more harm than good? HRM investigates in the final instalment of our pay series.

The European Union (EU) recently proposed making pay transparency a binding measure for its member states. The thinking is that pay transparency could help European countries close their 14 per cent gender pay gap. 

In Australia, there is no obligation for private organisations to reveal compensation amounts. In fact, some employment contracts even include a pay secrecy clause that prohibits employees from having conversations with each other about their pay. But that doesn’t mean the concept of pay transparency doesn’t pique the interest of some Aussie employers. Also, it’s nothing new. HRM has been writing about this for years.

However, the benefits of pay transparency are discussed endlessly, but less attention is paid to the potential downsides. Below, HRM presents the case for and against pay transparency. 

The risks of pay transparency

To get a research-backed look into the potential risks associated with pay transparency, let’s turn to our primate friends, monkeys.

What can I learn about pay transparency from a monkey, you ask? Quite a lot, actually.

In 2003 primatologist Frans de Waal and professor of psychology Sarah Brosnan conducted an experiment demonstrating the emotional impact of revealing discrepancies between rewards. Interestingly, they found capuchin monkeys have very strong reactions to perceived inequality. 

In the study, two capuchin monkeys were paid in pieces of cucumber for completing a task, in this case, handing a rock to the researcher. After this pattern had been established, the researcher started paying one of the monkeys with grapes instead – both monkeys were aware that this was a more delicious, and therefore more desirable, treat.

Once the cucumber monkey saw its mate being paid in grapes, all hell broke loose. The cucumber monkey flung its cucumber back at the researcher, rattled its cage in anger and started screeching.

Interestingly, the monkey was perfectly happy with its cucumber prior to noticing its mate was receiving preferential rewards. 

“It doesn’t make anyone feel good to know that their colleagues are earning ten grand more than them,” 

“There is a real risk of causing disharmony in the workplace and damage to the organisation’s culture by broadcasting everyone’s salaries,” says Shane Koelmeyer, director and CEO of Workplace Law. 

“Particularly when there are other options to address issues around pay parity.”

Koelmeyer is not alone in feeling this way, and the science is there to back up his concerns.

In Norway, tax records are publicly available, so anyone can look up their friends’, neighbours’, or colleagues’ income. In 2019 researchers conducted a survey to study the happiness and life satisfaction levels of high and low income earners during the weeks when the records become available. 

Higher transparency increased the happiness gap between high and low income earners by 29 per cent, and the life satisfaction gap by 21 per cent – i.e. high income earners reported being happier around this time, but low income earners felt worse. They realised they were getting cucumbers. 

The researchers add a note that this doesn’t necessarily imply that pay transparency is bad, but that it should be paired with alternative ways of disseminating information to ensure the positive elements prevail. More on that in a moment.

In a similar study to the Norwegian research, researchers at the University of California studied how UC faculty members reacted when they could compare their pay with others. 

Employees who discovered they made less than the median range became less satisfied in their role and those who were paid above the median rate reported no increase in role satisfaction. Not only that, but the research suggested pay transparency would increase the two-to-three year turnover rate of lower ranked employees. 

Let’s return to our capuchin friends for a moment. When the unfair treatment continued between the monkeys, eventually the cucumber monkey stopped performing its role altogether. Once again, humans are not dissimilar. 

A 2015 study found reward transparency reduced performance among those who knew others were getting a better reward. In this case, it was a workplace competition for different prizes. Teams that perceived their prize as smaller than that of other teams decreased their output, resulting in lower performance. 

What should workplaces do?

Employers already know how much their people are making, says Koelmeyer, so the obligation should fall on them to make it fair. 

“Employees shouldn’t be arguing for a pay increase just because someone else is making more,” he says. 

“Instead, workplaces should be very clear on how they set pay rates and what factors influence it.”

Employees don’t often know exactly what their peers’ roles entail, he says. “One person may think they’re on the same level as someone but they’re not,” says Koelmeyer. 

Let’s say Susan comes forward to argue for a pay rise because her teammate Jane makes ten grand more than her.  Susan might have no idea that Jane’s KPIs are much higher than hers. 

“If their role expands, or their duties increase, that’s the reason they should be asking for a raise.”

Rather than pay transparency, organisations should make job responsibilities clear, says Koelmeyer. They should also be frequently reviewed to ensure accuracy. 

This way if an employee comes forward requesting a pay rise, employers can point to their job description to explain why they make what they make. Or they can explain what additional duties or performance criteria the employee needs to meet to receive a pay rise. 

The gender pay gap

It’s worth noting there is a link between pay transparency and improving the gender pay gap. 

According to the Workplace Gender Equality Agency, Australia’s national gender pay gap currently sits at 13.4 per cent.  

Pay transparency helps to address this because it forces organisations to admit if they’re underpaying their female employees. Most employees won’t stand for this in 2021. 

Even Koelmeyer, with his reservations about pay transparency, acknowledges that it can improve pay equality. 

“On an industry level, greater knowledge about remuneration levels may assist women in the negotiation of their pay and conditions,” he says in an article for Smart Company.  

However, it has to happen on an industry-wide scale to be truly effective. 

A 2011 study from Austria found just this. Making pay transparent within the organisation only reduced the gap by 0.3 percentage points. But, if employees, particularly women, know how much other organisations pay, they are in a better position to argue for higher pay or to look for a higher paying job.

What can I learn about pay transparency from a monkey, you ask? Quite a lot, actually.

What should workplaces do?

Employers that do want to implement pay transparency shouldn’t be doing so on a whim. 

A guide from US consultancy firm Mercer outlines how organisations should go about being transparent about pay. It starts with assessing the current state of pay within the organisation.

The guide’s authors suggest taking an honest look at your remuneration policies and how they line up with job descriptions. This is advice Koelmeyer echoes.

“I would encourage organisations to create a rigorous framework around their compensation policies,” he says. 

“Employees need to understand why they get paid what they do. This shouldn’t be something employers need to scramble for or make up on the spot, it should be very clear to all employees.”

It is also worth mentioning that pay transparency doesn’t need a published list outlining how much each employee makes. It could be as simple as changing how conversations around pay happen in your workplace. 

Ask yourself this, who do you discuss pay with more? Internal employees or external candidates? It’s likely your answer is the latter, so perhaps it’s time to normalise those conversations internally.

Whether pay transparency is right for you is always going to be up to individual organisations. There are pros and cons so just make sure you weigh up both before diving in.

You can view part one of this series here, which explores the case study of a company that allows employees to choose their own pay. Read part two here, which dives into interesting research on why you should be paying your lower performers more money.

Thinking of changing your workplace policies? AHRI’s short course can help you implement them effectively.

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