When it comes to their salaries, Americans are pretty pessimistic.
Almost two-thirds of over 71,000 U.S. employees who are paid the market rate for their positions believe they’re underpaid, according to a PayScale survey. These workers also said they’re considering looking for higher-paying work somewhere else, and they’d still leave if you gave them a raise.
That’s because employees at companies that didn’t practice transparency just assumed that their coworkers were making more money.
“It turns out that pay transparency—sharing salaries openly across a company—makes for a better workplace for both the employee and for the organization,” David Burkus, author of Under New Management: How Leading Organizations Are Upending Business as Usual, said in his TED Talk earlier this year. “When people don’t know how their pay compares to their peers’, they’re more likely to feel underpaid and maybe even discriminated against. Do you want to work at a place that tolerates the idea that you feel underpaid or discriminated against?”
Keeping salaries secret does exactly that. Since companies are often transparent about expenses like health care and travel that have skyrocketed over the past few years, “It makes sense to pivot from the old way of keeping pay grades under a veil of secrecy to a more transparent way by sharing the compensation information on all employees based on the different roles,” says Tim Tolan, CEO and managing partner of the executive search firm The Tolan Group.
In fact, being open about what you pay employees can have benefits that exceed the savings companies can have by negotiating with each individual employee.
“Transparency in pay provides employees with reassurance that they are being treated fairly in relation to their peers,” says Jeanne C. Meister, coauthor of The Future Workplace Experience: 10 Rules for Mastering Disruption in Recruiting and Engaging Employees. “They may still leave, but pay may not be part of the equation.”
Workers who are paid less than the market rate for their jobs were more satisfied if their employer was transparent about their pay, according to PayScale. And if someone sat down and openly discussed the reason behind the compensation, their job satisfaction rose from 40% to 82%.
In a study from Cornell University and Tel Aviv University, researchers found that keeping salaries secret is associated with decreased employee performance. In an experiment, students were paid a base salary for completing three rounds of a computer matching game. While participants played the game individually, they were assigned to a four-person work group. Half of the participants were informed about only their own performance and bonus pay, while the other half experienced pay transparency, being told what the other team members were being paid. The study found the group that had pay secrecy also had decreased performance in the task.
Pay transparency provides an incentive for employees to climb the ladder, says Burkus. “The research shows that when people know how they’re being paid and how that compares to their peers, then they’re more likely to work to move up it,” he said in an interview with Harvard Business Review. “And even those high performers are more likely to work hard to stay high performers in order to demonstrate why they bring that much value to the organization.”
Transparency requires employers to justify their decisions, and makes it less likely that these decisions will be based on bias or discrimination, says Kate Mueting, a partner in the Washington, D.C., office of Sanford Heisler, LLP.
“For example, D.C. has one of the lowest gender pay gaps in the country (11%), and this is largely attributable to the fact that the federal government has lock-step, transparent compensation,” she says.
Earlier this year, Fast Company reported that President Obama had announced a proposal aimed at closing the gender wage gap by requiring companies with 100 or more employees to report their staff’s pay broken down by race, gender, and ethnicity to the Equal Employment Opportunity Commission (EEOC). This information would be an update to the EEOC tool that currently collects wage data from businesses and isn’t scheduled to start until September 2017.
“In reality, salaries remain a sensitive topic,” says Lauren Griffin, senior vice president for Adecco Staffing. “Before openly speaking about your income with peers, it’s important to consider whether those conversations would offer any benefit.”
For example, sales environments commonly share performance rankings, which hint toward a person’s paycheck. “In that situation, openly discussing pay could encourage teams to share best practices and drive them to get better,” she says. “In addition, it could help retain less tenured employees who want to know what to expect as they move up within an organization.”
While there may be justifiable reasons why one employee commands a higher salary, such as increased responsibilities or experience, pay discussions can cause team members who don’t have access to the big picture to become disgruntled and feel undervalued, says Griffin.
“Once you open this door, you can’t close it,” she says. “Employees who perceive that their salary isn’t fair when compared to a peer’s can spread those frustrations to other colleagues and teams, ultimately leading to poor engagement, turnover, and decreased productivity.”
Other companies post pay rates for certain positions and let employees figure out individual salaries based on the hierarchy or their organizational chart. Some companies share their formula for calculating pay rates, while others provide the median salary for key roles and make this transparent both inside the company as well as on the company’s Glassdoor page.
“Some executives are concerned about the privacy issues,” says Tolan. “A way around sharing exact amounts would be to use salary bands and provide ranges for each role—and while you would still know which band a coworker is in, you probably would have to guess at their actual salary.”
Sunlight makes it impossible to hide things, said Berkus in the HBR interview. “And so in a transparent culture, regardless of how you do it, you tend to find people who have a higher sense of the organization being fair,” he says. “You tend to see increases in collaboration and all sorts of other positive effects.”