What really happens when workers learn the truth about salaries

At many companies, discussing salaries is considered a taboo that’s kept to whispered conversations around the water cooler or brief mentions at after-work drinks. But, according to a new study, a lack of pay transparency among peers in the workplace might be damaging employee morale.

The study, authored by a group of cross-institutional business and finance professors and published in the Social Science Research Network, examined Glassdoor employee ratings of compensation satisfaction at more than 1,300 publicly traded firms. The researchers compared these ratings from before and after a 2018 Securities and Exchange Commission (SEC) mandate, which required that companies disclose the CEO pay ratio—a metric that compares CEO pay to that of the median employee. Prior to this mandate, employees did not have access to an official estimate of their peers’ compensation.

The results show that, contrary to popular belief, the conventional approach to keeping employee salaries hush-hush may actually have a damaging effect. Here’s what executives need to know about the findings:

Employees are already making their own assumptions

According to Lisa LaViers, an assistant professor of accounting at Tulane University and co-author on the study, previous research on pay transparency started with the assumption that employees knew nothing about what others were being paid.

“It was also assumed that when the employees learned they were paid more than others, they would think that was fair and it wouldn’t make them any happier—but if they discovered they were paid less than others, it would make them unhappy,” she says.

This theory, called the Fair Wage Effort Hypothesis, caused executives to believe that the net effect of pay transparency would be dissatisfaction among employees. However, LaViers explains, this research doesn’t apply well to a modern economy, where employees have much broader access to pay information.

“Employees are doing their own research, and aren’t content to stay in the dark,” she says.

Pay transparency increases compensation satisfaction

To better understand employees’ assumptions and sentiments, the study examined about 300,000 individual compensation ratings across firms in 62 different industries both before and after the 2018 SEC mandate.

It found that, when employees gained access to an idea of the median employee compensation at their firm, their own compensation satisfaction went up—pointing to the fact that many employees overestimate how much their colleagues make, and having the real number actually improves their own sentiments.

“In general, finding out about the high rates of CEO pay makes employees mad. But the thing about our research is that employees already knew what the CEO was being paid; their anger about that was already baked into their pay satisfaction,” LaViers explains. “The new information being disclosed was that of the median employee. This number is much lower than CEO pay and provides a much more favorable comparison point for rank-and-file employees. Giving them this new comparison point helped put their own wages into a more favorable light.”

Managers should challenge their own ideas

Based on these findings, the authors have a few suggestions for managers who may be operating under the preconceived idea that pay transparency is bad for business. 

To start, they write, managers should assume that employees are looking for compensation averages online, and they should be actively keeping an eye out to make sure that any estimates floating around are up-to-date. 

“Whether or not you implement a policy of pay transparency, employees are developing ideas of what others in the firm are making,” LaViers says, adding that many of those preconceptions are either “inaccurate” or “inflated.”

It may also be helpful to use anonymous surveys in an effort to understand whether employees believe they are being underpaid compared to their peers. If those notions exist, adopting greater pay transparency could help to alleviate the tension.

“Unless your company is actually paying people unfairly (which is a different problem entirely!), you may benefit from implementing a policy of greater transparency,” LaViers says. “It will help you take control of the narrative and give employees more realistic reference points to compare their own wages to.”