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posted on 19 May 2017

Why Companies Should Stop Keeping Their Employee Salaries A Secret

by The Indian Economist

-- this post authored by Tanza Loudenback

Among the many topics you shouldn’t broach in the workplace, discussing salaries with your coworkers has long been considered one of the biggest offenses.

It’s natural to feel squeamish talking about money, particularly when it’s tied to the value of your skills and hard work.

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Researcher David Burkus writes in his 2016 book “Under New Management: How Leading Organizations are Upending Business as Usual":

“In most of the Western world, salary just isn’t something people feel comfortable talking about. To many people, it’s the polite and right thing to do to keep salaries secret."

However, what workers - and many employers - may not realize, is that keeping salaries under wraps is proven to be more harmful to performance, hiring, and the economy at large, Burkus, who is an associate professor of management at Oral Roberts University, tells Business Insider.

In one study Burkus cites, researchers from Cornell University and Tel Aviv University paid 280 Israeli a base salary for completing three rounds of a computer matching game, along with bonuses based on performance. They fully divulged the pay information to some students, while keeping it secret from others.

The researchers found that those who were kept in the dark performed worse than those who were informed.

In another study conducted through Amazon’s Mechanical Turk platform - an online platform for recruiting for small-scale tasks - 2,000 participants were asked to complete two rounds of data entry and paid for each correct entry. After the first round, some were showed their own earnings, and some were showed their earnings plus the earnings of other participants.

The people armed with salary information “worked harder and significantly increased their performance" in the second round, writes Burkus. What’s more, he continues, high performers in the first round who learned of their earnings worked harder to maintain or exceed their level of performance in the second round. Burkus writes:

“Taken together, these two studies suggest that not only does pay secrecy put a damper on individual performance, but also that revealing pay information can actually increase performance, especially among top performers."

Whole Foods led the way, other companies fought against it

Whole Foods co-CEO John Mackey recognized the harm in keeping salaries secret more than three decades ago. In 1986, a few years after founding the health-food store chain, Mackey made compensation data available to all employees to encourage more conversation among staff members and to promote competition within the company.

Mackey and others at Whole Foods believe the policy has created a “shared fate" among employees. “If you’re trying to create a high-trust organization, an organization where people are all-for-one and one-for-all, you can’t have secrets," Mackey explained in the 2014 book “The Decoded Company: Know Your Talent Better Than You Know Your Customers."

Whole Foods was undoubtedly ahead of the curve. Burkus mentions a 2001 survey of US employers found that more than one-third had instituted policies prohibiting their workers from simply discussing salaries. And a 2010 survey by the Institute for Women’s Policy Research revealed nearly half of US workers reported they were either “contractually forbidden or strongly discouraged" from discussing pay with coworkers (although, as of 2014, 10 states had passed laws protecting employees’ rights to discuss salaries).

Todd Zenger, a professor at University of Utah’s Eccles School of Business, wrote in the Harvard Business Review last year that pay transparency is “far from a panacea …[and] a double-edged sword, capable of doing as much - or more - damage as good." Zenger says open salaries create an obsession with pay and cultivate “inflated self-perception" among employees, in addition to becoming a costly agent for change for employers.

Burkus, however, thinks the reason companies shy away from pay transparency is fear:

“It’s fear that when people find out that different people get paid differently, they’re not going to be able to have the maturity and make the mental leap to see that there are reasons why a certain person is paid more than the other."

More companies are embracing it today - and they’re seeing results

Yet, that fear is beginning to melt away, says Burkus, thanks in part more robust research on pay transparency and new regulations in many states. He said:

“It’s definitely a trend that we’re seeing, it’s a trend that appears to be driven by the tech sector, but it is across all sectors."

Two tech companies, in particular, have made pay transparency a core part of their company culture, becoming dynamic case studies for what an open pay system can do for business.

One New York-based data analytics company, SumAll, launched in 2011 with completely transparent salaries among its 10 employees. Now, with more than five times the number of employees, salaries are posted on an internal network available for all to see, Burkus writes.

While Dane Atkinson, SumAll’s CEO, has said the unconventional policy sometimes trips people up during interviews when they’re expecting a salary negotiation, new employees end up relishing in the company’s openness. In fact, so much so, Atkinson tells Burkus, that employees regularly decline offers from Facebook and Google because they value SumAll’s pay transparency policy, which encourages employees to approach management with any qualms about their pay (or others’).

Social media management company Buffer ups the ante on pay transparency. Employee salaries at the all-remote company are shared not only among staff, but also with the world.

In late 2013, Buffer CEO Joel Gascoigne listed staff salaries on the company website - including his own six-figure paycheck - and the formula used to calculate those salaries.

The formula, which has been updated since the original unveiling, is based on an employee’s role, experience, loyalty to the company, and stock options. In the month after making salaries public, Buffer received twice the amount of job applications, Burkus reports. He said:

“When it’s out in the open, people might still disagree with certain parts of the payscale, but they have recourse. You can actually be mad at the system, and then use that disagreement to make a positive change in how the pay for the company is structured. Which is a much more productive use of your angst than just sitting and seething at coworkers for thinking that they’re overpaid."

A tool for reducing the gender pay gap

Burkus acknowledges the difficulty in setting up a transparent system at large, established companies - presumably those outside of the highly experimental tech world. He suggests the best model for open salaries is the US government, which uses a tier system:

“In the federal government, you’re G1, G2, G3, and every position is fixed to a level and then the pay for that level is determined every year, or every two years. That’s probably what’s more reasonable to ask a big company to do, is just to fix every job to a tier and then pay out based on what those tiers are."

Further, this open salary tier system can be an invaluable tool for reducing gender pay inequities. According to a 2011 Institute for Women’s Policy Research report, the gap for full time-workers was 23%, compared to 11% in the federal government, where pay is public.

When employees are armed with data about their pay and the pay of their coworkers, it provides the opportunity to bring inequities to the attention of management. writes Burkus wrtes:

“Openness remains the best way to ensure fairness."

Tanza Loudenback writes for the lists team at Business Insider.

This article was originally published on World Economic Forum.

The Indian Economist is a content sharing partner with GEI.

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