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.
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
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
a) What are other people making?
b) Am I making enough?
c) 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
a) The gains you get in lateral recruitment through the information asymmetry
b) 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
Thanks and Regards!!
Sonia