Pay transparency can send mixed signals to employees
- Sep 27, 2022
While pay transparency is designed to combat inequity and discrimination, detractors are concerned it could cause envy between co-workers leading to dissatisfaction, and lack of motivation and cooperation.
Even though there is an increasing push towards greater pay transparency in the workplace, little consensus exists regarding its effect on organizations. In the new, foundational whitepaper, Pay Transparency: Silver bullet or kryptonite? Kun Huo of the Ivey Business School at Western University and Kate Patterson of WU Vienna explore both the intended and potential unintended consequences of pulling back the curtain on employee compensation.
Throughout the study, Huo and Patterson outline the thorny issue, explaining why leaders may struggle to avoid mixed signals and varying impacts for their employees, including the following effects and consequences:
- May strengthen the effect of pay equity, with employees scrutinizing input/output ratios more closely and holding management accountable for discrepancies;
- Could exacerbate self-serving bias suggesting people overestimate their own performance and underestimate the performance of others;
- May perpetuate the fundamental attribution error, meaning that individuals tend to attribute their successes to internal factors, such as skill and effort, and conversely, attribute failures to external factors, such as bad luck;
- Some employees may become jealous of co-workers’ higher pay – regardless of relative performance; and
- Managers may strategically change their evaluation and compensation practices, keeping pay difference narrow to avoid conflict.
Overall, Huo and Patterson reveal leaders must acknowledge that pay transparency will impact behaviours, both positively and negatively, and should recognize that it affects different people in different ways. As a result, organizational leaders need to tailor the policy according to their unique task environment, and improve their understanding of firm-level performance measurement data before proceeding.
“Before going transparent, organizations should know whether they have the data to explain pay discrepancies,” said Huo. “If such data exists, we believe organizations should try to correct any injustices before revealing pay information.”
Click link for the paper: https://www.ivey.uwo.ca/media/v0lf5wd5/pay-transparency.pdf
Kun Huo’s research is supported by a SSHRC Insight Development Grant. The funds enables his research investigating the effects of pay transparency on individual performance, team cooperation, and managerial resource distribution decisions using experiments. Currently, he is conducting experimental research in the Ivey Behavioural Research Lab on pay transparency and pay dispersion.
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About the Ivey Business School, Western University
The Ivey Business School (www.ivey.ca) at Western University is Canada’s leading provider of relevant, innovative and comprehensive business education. Drawing on extensive research and business experience, Ivey faculty provides the best classroom experience, equipping graduates with the skills and capabilities they need to tackle the leadership challenges in today’s complex business world. Ivey offers world-renowned undergraduate and graduate degree programs, as well as Executive Education at campuses in London (Ontario), Toronto and Hong Kong.