Who Benefits When Salary Info Is Public?

It’s good for pay equity, and it can be good for managers, but it’s not so good for superstars.

By Sarah Kessler of The NY Times. 

This article is a good example of tradeoffs. A new law might help some people while hurting others. There are often both winners and losers from a government policy. New laws also create some unintended consequences (some of those are in red below). Excerpts:

"This month, laws went into effect in California and Washington State that required companies to post salary ranges on job listings. Like similar rules in New York City and Colorado, lawmakers passed them on the premise that pay transparency helped reduce wage gaps.

There’s little debate among researchers that this is the case. “It is totally 100 percent true across all the studies I’ve seen, with very few exceptions,” Zoe Cullen, an economist at Harvard Business School, said. Pay transparency laws are “very good” at reducing wage disparities, she added."

"In a study published in the journal Nature Human Behaviour, researchers analyzed the salaries of 100,000 academics over 20 years. As websites made their salaries easily searchable, the gender pay gap improved by almost 50 percent. But the gap between academics who performed best — based on markers like publications, awards, grants and patents — and those who performed less well also shrank.

“What the transparency seems to do is that it dampens the performance-based incentives,” said Tomasz Obloj, an associate professor at Indiana University Kelley School of Business who co-authored the paper."

"One explanation for why some types of pay transparency tend to weaken the link between income and performance is that this disclosure weakens individual bargaining power. If salaries are public, employers can claim that giving one worker a raise would mean that they would have to give everyone a raise. Workers may also be less likely to try to bargain in the first place if there’s a public salary range for a position.

“They see the posted price and think, Hey, I’m not going to be able to ask for more because obviously they’re not going to change their entire website, which applies to everybody, on my behalf,” Ms. Cullen said. She was a co-author of a working paper for the National Bureau of Economic Research that found wages on average fell by 2 percent when laws protecting pay transparency were introduced in the United States.

There are other ways that employers may benefit from pay transparency. For example, some research suggests that when wages are more transparent, employees tend to work harder.

In an experiment at a large commercial bank in Asia, Ms. Cullen and a co-author found a similar result: Workers tended to underestimate the salaries of their managers. When the bank made salaries public, they learned they would earn more than they had if they moved up the ladder and put in more effort.

Companies that pay fairly may benefit most from this effect. In an ongoing project, Mr. Obloj and his co-authors looked at productivity and pay for 20,000 academics. They found that at universities that paid fairly, increased pay transparency resulted in an overall boost to productivity, while at universities where pay transparency revealed unfair pay, productivity dropped. Other research has suggested a similar pattern for turnover: When pay systems are perceived as fair, pay transparency is associated with lower turnover rates. When it is perceived as unfair, the opposite is true.

When salaries become more transparent, some managers may finesse the system by compensating employees in ways that are less public, like bonuses and benefits. And that can undermine the reduction in pay gaps. “If we’re shifting rewards to other forms where there’s less transparency and where we also know that there is gender inequity, we’re not really solving anything with pay transparency,” said Peter Bamberger, a professor at Tel Aviv University. He co-authored a study published in the Academy of Management Journal that found that employees were more likely to request, and managers were more likely to grant, these kind of perks when pay was public.

In order to avoid the trap of paying everyone the same thing regardless of performance, or shifting to less transparent systems, Mr. Bamberger said companies needed to figure out how to assess performance and explain differences in pay. “Those companies have a competitive advantage,” he said."