One Benefit of Pay Transparency? More Productive Workers

​As pay transparency becomes more common, the relatively new practice has been fraught with questions and concerns: Will it be too much of an administrative burden for employers? How much will it affect candidate attraction? How will employees react to knowing colleagues' salaries—or having colleagues know their own?

New research offers an answer to the last question, indicating a new, and perhaps surprising, benefit to the practice: Disclosing salaries may motivate employees to work harder.

A pair of new studies suggests that if employees are aware of how their salary compares to that of their colleagues, it may compel them to work harder to prove their worth.

One study, from researchers Cédric Gutierrez of Bocconi University in Milan, Italy; Tomasz Obloj of Indiana University; and Todd Zenger of the University of Utah, specifically looked at how wage information affected U.S. academics and found that those who were overcompensated increased their efforts when salary information was disclosed. Once pay transparency revealed how academics were paid compared with their peers, the study found, higher-paid academics published roughly 7 percent more articles, on average.

Meanwhile, another study examining the effect of pay transparency on a little more than 2,000 bank workers found that once workers learned their managers earned more than they expected, they worked harder because they then saw a pathway toward career advancement.

Pay transparency can result in boosted employee outcomes in the form of greater productivity, employee engagement and an enhanced employee experience, said Muriel Taing, senior compensation consultant at consulting firm Mercer.

"When employees have more visibility into what they can potentially earn, coupled with an understanding of how they can progress in their salary range, they will be motivated to work harder and understand the tools to use to put in the effort to achieve it," she said.

The new findings come as pay transparency gains an increasing foothold in the workplace. Heightened employee expectations around salary disclosures and new laws requiring disclosure in some parts of the country mean more employers are adding salary information to their job postings. Recent data from jobs site Indeed found that more than 40 percent of U.S. job postings on the platform now include employer-provided salary information, an increase of 137 percent in the past three years.

'How an Employee Perceives Their Pay Matters'

Despite the potential benefit of pay transparency on employee outcomes, there is an important caveat: That positive outcome will be the case only if the employee sees their pay as fair.

The bank study, for instance, found that workers who discovered they were being underpaid relative to their colleagues grew less satisfied with their jobs and were more likely to look for a new one. 

"How an employee perceives their pay matters," Taing said. "If an employee perceives their pay to be unfair, it can reduce employee morale, and they will be more likely to look at opportunities outside of their company where they feel they can achieve more fair pay and where they perceive it will be a more equitable exchange of the contributions they are making to the company."

To make pay transparency work, employers need to be open about pay practices and how pay is determined at the company, she said. If employers don't share "this context, employees may be confused about how they are being paid and question why their colleagues' pay is similar or different," Taing said. "If an employer decides to share colleagues' pay across the organization, they will especially need to be clear about explaining what their company defines as the 'market,' since it's unique to each company, and be clear about the factors that are considered at their company to differentiate pay, like performance ratings and experience."

Lack of a common understanding of these two areas between employer and employee may "lead to inadvertent employee perceptions about how pay actually works at their company that companies will find themselves needing to address," she said. She added that it's important to realize that what matters to employees is understanding where they are paid relative to their salary range and why.

"Pay transparency isn't only about sharing pay information," Taing said. "It's a broader exercise for employers to build trust and strengthen their relationship with employees by helping employees understand their salary in the context of market and business realities."