Strategy

Can pay transparency pay off?

Making salaries public can foster fairness and equality. But your staff are unlikely to love you for it.

People meeting in a public place

(Daria Shevtsova/Unsplash)

In the game of salary negotiation, conventional wisdom holds that whoever mentions their target number first loses. Peter MacLeod, CEO of Toronto consulting and research company Mass LBP, need not worry about that, because everyone at his firm makes the same amount: $55,000. “We’re in our fourth year, and there are only six of us,” he says. “It was important that everyone on my team had equal skin in the game.”

Since the private company assists governments in consulting with taxpayers, MacLeod thought transparency was especially important. He was also uncomfortable with the disparities that exist between top and bottom earners at some organizations—even the progressive think-tanks at which he previously worked. “There’s something distasteful about the annual review wage race. I think it’s costly in terms of morale.”

The Mass LBP system is still unusual, but others—especially young startups—are adopting similar philosophies of equal pay or salary transparency. Combine that with public-sector salary disclosure laws and workers who report their earnings anonymously to online databases compiled by Glassdoor.com and Monster’s Salary Wizard, and it starts to seem like the paycheque is becoming less of a secret than it once was. Research suggests that both companies and staff can benefit from open payrolls, if such policies are handled carefully.

The Institute for Women’s Policy Research, for example, recently published a study that examined the pay of U.S. government workers whose salaries were public. It found the gender pay gap hovered just above 10%—well below the 23% in the private sector. (The Canadian private-sector wage gap is similar, at 20%.) But while openness about pay may foster fairness in men’s and women’s pay, employees usually don’t like it. When the Australian School of Business studied attitudes toward pay openness, it found that top earners increased their effort and accuracy when their high compensation was known. Those low on the pay scale, however, weren’t motivated to work harder in order to improve their pay; in fact, the quality of their work suffered.

Even in the age of social-network-driven openness, most people find having their pay made public a deep invasion of privacy. Last spring, Andrew Eckford, an engineering professor at York University, expressed frustration at being included in Ontario’s list of employees of publicly funded institutions who earned more than $100,000. “I agree that the public deserves to know how their money is being spent,” he wrote in a blog post. “But I’m a middle-ranked professor with no administrative authority, and my pay is set by collective bargaining. Do you need to know exactly how much I get paid?”

Compensation consultant Ann Bares says disagreements about levels of pay transparency are rooted in poor communication between those who pay and those who are paid. “An appropriately transparent pay program is one where we have clearly communicated with employees the why and the how of the organization’s pay practices,” she writes on her blog.

Authors of the Australian study say the key to avoiding conflict with employees is clarity from the first salary negotiation. Managers should spell out how the salary and bonuses are awarded, outlining specific criteria that must be met and how performance is measured. This is especially important for women, since research shows they are less likely than men to negotiate an improvement to an opening offer and so may well start at a disadvantage.

MacLeod says his policy is working, but he won’t commit to keeping it forever. While today he’s attracting staffers who are passionate about the consultative process, he may need to tier the pay to recruit specialists as the business grows. Still, he says his commitment to fairness and open conversation about pay won’t change. “If we were more honest about what we make, owe and spend, we might have lower levels of these disparities,” says MacLeod. “Salaries are one of the last great taboos, and like anything that’s taboo, once you puncture it and deflate the mythology, it doesn’t seem so special anymore.”