[cajobportal Insights] Why you should know how much your co-workers get paid?  

Introduction

A decade ago, when I had just started my career, I came across this interesting practice. When the company’s Annual Report was released, we, as employees would look at the disclosures under Section 217(2A) in The Companies Act, 1956. These contained the names of our top bosses, qualifications and their salaries. All salaries in excess of Rs 24 lacs p.a. were disclosed as mandated by the law.  [Currently, the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires disclosure of names of the top 10 employees in terms of remuneration drawn’ and the name of every employee, who earn above the threshold of Rs 1.02 crores]

It used to set tongues wagging as to who earned what, who was overpaid and who was underpaid, career progression in the company and where we could visualise ourselves twenty years down the year.

When an MBA from a reputed B-school joined my department, we, the incumbent Chartered Accountants, would hazard a guess to what his salary could be?

Then one day, someone found his payslip left accidentally at the printer and we suddenly started discussing how his salary was 40% higher than ours. The event won him a lot of unfriendly glances for some time to come.

The moot point is that most of us are uncomfortable with the idea of broadcasting our salary. It is common perception that if everybody knew what everybody got paid, then all hell would break loose. There’d be arguments, there’d be fights and there might even be a few people who quit.

But for what if secrecy is actually the reason for all that strife? Maybe, it so happens that when people don’t know how their pay compares to their peers’, they’re more likely to feel underpaid and maybe even discriminated against

And what would happen if we removed that secrecy? What if openness actually increased the sense of fairness and collaboration inside a company?

Pay Scale Study

Managers know that engaged employees are more effective. But despite the vast amount of employee engagement research out there, very little of it focuses on a person’s primary reason for employment in the first place: getting paid.

Pay Scale, the compensation software company, surveyed 71,000 employees to study the relationship between pay and employee engagement.

Two thirds of people of those surveyed were those who were paid right at market rate

Surprisingly, while these people should have been satisfied, in a ‘pay secrecy’ environment, they rather felt that they were underpaid compared to the market.

And then the majority of everybody who felt they were underpaid compared to the market, intended to quit.

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60% of employees who perceived they were underpaid said they intended to leave, compared to only 39% of those who perceived they were overpaid.

The bottom line is this: if you don’t communicate to your employees that they are being paid fairly compared to their talent market, they may leave.

Advantages of ‘Openness’

Opening up salary information prevents the nasty surprises that happen when pay is kept secret—when an employee discovers by accident that he’s making far less than colleagues, but can’t discuss it because he isn’t supposed to know.

In one famous example from decades ago, the management of Vanity Fair magazine actually circulated a memo entitled: “Forbidding Discussion among Employees of Salary Received.” “Forbidding” discussion among employees of salary received. Now that memo didn’t sit well with everybody. New York literary figures Dorothy Parker, Robert Benchley and Robert Sherwood, all writers in the Algonquin Round Table, decided to stand up for transparency and showed up for work the next day with their salary written on signs hanging from their neck.

So, hypothetically, consider a scenario in your company where everyone knows how much money everyone else is earning

David Burkus, an Associate Professor of Management at Oral Roberts University is of the firm view that it can be a game changer as far as organisation dynamics are concerned

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Mechanisms

He states three modes in which ‘salary transparency’ can be implemented as an organisational philosophy

Complete transparency

Technology companies like Buffer where everybody knows what everybody gets paid. The technology company posted a formula and then ran salaries according that formula. And then that created conversations that had them change the formula and change salaries, so that they could basically get employee input on here’s how we should define what bringing value to the company is.

Whole Foods, the leading super market chain, has made salaries transparent since the year 1986. Employees can look up salaries for everyone from its cashiers to the co-CEOs.

SumAll has every employee’s salary is included in a company-wide Google Doc.

It has had experiences where in course of hiring a new engineer, one of the existing employees in the team looked at the salary that was going to be offered to the new hire, and realized that the new hire had less experience but was going to be offered a bigger salary than he was. And so he actually protested that this was unfair. And they said, you’re right. You deserve a raise. I’m sorry we overlooked that, and so we’ll fix it.

Position wise

There are other companies that just say this is what this position pays, and then you can extrapolate out who’s in what position or what tier in the hierarchy or org chart.

Formula driven

And then other people just post the formula and state that everyone’s salary is say formula driven and that the same is non-negotiable. So basically a bit of data crunching and can you figure out your co-worker’s pay

The argument he puts forth is that mechanisms such as these ensure that in all of the cases, you know what it takes to move up the pay scale, what it takes to perform and make more money. Thus there is an overarching commitment to fairness because things like discrimination and wage gap tend to hide in the dark corners

And sunlight makes it impossible to hide things like that. 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. You tend to see increases in collaboration and all sorts of other positive effects.

Consider the people in the middle of a normative distribution of performance. 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. 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.

Pay Secrecy – Information Asymmetry – Impact on Recruitment

George Akerlof -“The Market for Lemons”

Suppose buyers in the used-car market value good cars—“peaches”—at $1,000, and sellers at slightly less. A malfunctioning used car—a “lemon”—is worth only $500 to buyers (and, again, slightly less to sellers).

If buyers can tell lemons and peaches apart, trade in both will flourish.

In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with.

To account for the risk that a car is a lemon, buyers cut their offers.

They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But dealers who know for sure they have a peach will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon.

Smart buyers can foresee this problem. Knowing they will only ever be sold a lemon, they offer only $500. Sellers of lemons end up with the same price as they would have done were there no ambiguity. But peaches stay in the garage. This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car’s quality.

This “information asymmetry” between buyers and sellers kills the market.

Coming to “Pay Secrecy”

Most people start with the assumption that pay secrecy is good for the company. If employees don’t know how much everyone is making, it gives the company an edge in negotiations and maybe you can get great people at a discount.

As a talent acquisition professional in a company, you have access to all your employees’ salary, the prospective hire’s payslips etc.

And they have just their salaries and maybe a bit on information which they could glean through sources and Internet sites like Glassdoor.

So this leads to a condition which in economics is described as Information Asymmetry. In most cases, information asymmetry does provide those short-term gains. You can negotiate a little bit better. But most economists also warn that information asymmetry can cause the market to go awry, can cause multiple distortions in the long run.

The Washington example

In the year 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit.

But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more

Credit history is a credible signal: it is hard to fake, and, it is assumed that the ones with good credit scores will be better employees than those who default on their debts.

Robert Clifford and Daniel Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.

So information asymmetry is actually counter-productive in the long run because it forces people to get gripped by this looming insecurity

What are other people making?

Am I making enough?

Did they lowball me

Summing Up

Going by the Equity Theory by John Stacey Adams, people are always trying to calculate inputs to outputs, and are frustrated when they feel like they’re inputting more than they’re getting back compared to their peers.

And if you have a secrecy condition where nobody knows, it’s much more likely that people will guess improperly, will either think somebody is overpaid or underpaid, and that messes up the entire thing and creates that recipe for a market to go awry.

So the question that you have to balance

The gains you get in lateral recruitment through the information asymmetry

The impact of some of your other performers being potentially disengaged, being potentially frustrated, and always wondering where they compare to their peers on this issue?

I guess the latter outweighs the former.

While you might still think that secrecy is the easiest way to deal with the uncomfortable feeling of inequality, maybe it is time to think again

 

 

 

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We are a group of CAs and IIM Ahmedabad graduates who have launched cajobportal.com, India’s first recruitment website exclusively for CA,CS,CWA and MBA(Finance).Our Advisory Board includes senior leaders like the co-founder & former COO of naukri (.) com

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