It’s an established practice within most U.S. based firms to keep pay a secret. Ergo, while federal securities law requires publically traded companies to disclose the compensation of their five highest paid executives, most people are in the dark about how their earnings stack up relative to peers. Websites like Payscale and Glassdoor have made it easier than ever to get a ballpark estimate of the market rate for a job and/or skillset, but understanding where one falls on the pay continuum from an internal equity perspective remains in many ways as tricky a proposition as ever.
With that said, research from Elena Belogolovsky and Peter Bamberger suggests that perhaps companies should be rethinking their approach to pay disclosure. In a 2010 study, they found that pay secrecy can negatively impact the work performance of less inequity tolerant individuals. Part of this phenomenon is no doubt attributable to illusory superiority; many people overestimate their abilities relative to peers, assuming the value of their contributions far exceeds actual output. In this respect employers may be wise to be cautious about disclosing general population compensation data – even if pay is equitable there will always be someone who feels shorted.
Conversely, suspicion over the objectivity of organization’s pay policies is often justified. Managers have been known to take subjective, short-term approaches to divvying out merit increases to their direct reports as opposed to awarding pay increases based upon merit. And this practice says nothing of the role that new-hire salary negotiation plays in where one falls within a population from an internal equity perspective (a disparity that often only compounds on itself over time). These realities make pay disclosure an inadvisable endeavor for many companies. After all, as one of my comp mentors communicated to me early in my career, we need to be able to defend any decision we make around pay. Unfortunately, for many organizations this proves quite a tall order; and in such cases disclosing pay and bringing rampant salary compression issues to light would not only lower employee morale and engagement, but also open said employers up to significant legal liability. In this respect, a company’s ability to consider disclosing employee salaries comes down to its ability to justify how its workforce is paid.
But it can be done. There are organizations – like the San Francisco-based startup Buffer – that are disclosing the pay packages of every employee in the company. Having said that, Buffer unveiled what appears to be a fairly regimented salary formula at the time of its disclosure. Applying such a formula to a more mature company with a larger employee population and decades of compression issues might prove decidedly more difficult (Buffer has less than 50 employees at the time of this writing). Ironing out equity issues in such cases can take years and is sometimes never fully resolved.
Ultimately, however, I’m of the mind that salary disclosure – or at least range disclosure – is something that companies should aspire to… if for no other reason than because the publication of such information holds employers accountable for making sure their compensation structures are both aligned with performance and the external marketplace.
What do you think – yay or nay on salary disclosure? When and why? Please share your thoughts in the comments section below.
Rory C. Trotter Jr. is an HR Manager specializing in Compensation, Talent Management and Employee Relations. He has provided enterprise wide support on matters related to base pay, executive pay, and long-term incentives for a Fortune 50 company, managed employee relations for various operations and commercial client groups, and led recruitment efforts for hundreds of jobs spanning a wide range of functions, complexity, and scope. He has both an MBA and a Master of Human Resources and Industrial Relations from the University of Illinois at Urbana-Champaign. You can read more of Rory's thoughts on compensation and HR at rorytrotter.com and you can find him on Linkedin here, Twitter here, and Google+ here.
Creative Commons image "Magnifying Glass and Money" by Images_of_Money