Bosses worried about productivity are trying to get their workers back in the office. But they might be better off spilling how much they make instead.
When managers make their salary information public, it spurs employees to work harder, finds a new working paper for the National Bureau of Economic Research (NBER), written by Harvard Business School professor Zoë Cullen. She found that a sample of 2,060 workers at a large commercial bank worked harder after learning that their managers are better paid than they’d previously thought.
In fact, learning their bosses’ salaries galvanized them into taking hold of their career growth. They went on to log longer hours and generate higher sales revenue. However, those benefits were confined to vertical transparency, which reveals wages of workers at all levels. It leads to more accurate and optimistic beliefs about earnings potential, increasing employees’ motivation and productivity.
But Cullen’s research finds that most of the 71% of businesses in countries that are part of the Organization for Economic Cooperation and Development (which includes the U.S., Germany, Australia, and France), who have enacted pay transparency policies to stem income inequality, have enacted that transparency horizontally—meaning they’ve revealed pay between coworkers at similar seniority levels.
That had the opposite effect: When workers found out their same-level peers outearned them—or just earned more than they expected—productivity dropped. Perhaps, on some level, the workers recognized potential downsides. When Cullen asked the bank workers if they would want everybody’s name and salary published online, almost 75% of them said no.
So while transparency policies have narrowed wage gaps between coworkers, they have also led to what Cullen calls “demoralizing” comparisons and more aggressive bargaining from employers, which can lower average wages.
Also vital is cross-firm pay transparency, which allows workers to ascertain, across industries, what people with their relative experience and expertise are making across industries.
The findings echo that of recent research. A new study from researchers at Bocconi University, Indiana University, and the University of Utah found that higher-paid university academics produced roughly 7% more articles, on average, after transparency efforts revealed they were overpaid relative to their peers.
“Importantly, we find that these behavioral responses are not driven by absolute differences in salaries but rather arise from equity considerations or comparisons of performance-conditioned pay,” the researchers wrote.
On top of that, a large separate study from University of Utah’s David Eccles School of Business previously found that pay transparency “substantially reduces the gender pay gap as well as other forms of pay inequity.” And when firms increase wage transparency, they’re likely to see a reduction in unequal gender pay by up to 50%, as well as a “substantial” change to wage adjustment policies, particularly by giving bigger pay increases to historically underpaid groups.
Companies that pay low wages, James Flynn, an economics Ph.D. Candidate at the University of Colorado, wrote in the Journal of Economic Behavior & Organization, “have a strong incentive to keep salary information secret, while higher-paying firms could benefit from policies designed to increase salary transparency.”
But while knowledge may be power for workers, bosses have expressed concern that full pay transparency could bankrupt their workers’ productivity and loyalty and create tension and competition. That may not be the case—so long as workers don’t hate what they find.
