Cafe Classic: Pay Transparency and the SCARF Hypothesis

Editor's Note:  Some of my favorite Cafe posts over the years have been those tying science - particularly brain science - to the field of rewards.  A great example is this Classic from Stephanie Thomas, where she brings the lessons of neuroscience to the topic of pay transparency.

Everything we do, every thought we've ever had, is produced by the human brain. But exactly how it operates remains one of the biggest unsolved mysteries, and it seems the more we probe its secrets, the more surprises we find.

-Neil deGrasse Tyson 

I'm continually amazed by the things neuroscience is uncovering about our brains. These discoveries are interesting in and of themselves, but many of them have practical implications for the workplace.  I revisited an article about neuroscience and performance management by David Rock, Josh Davis and Elizabeth Jones, and I started thinking about how these insights into brain function might relate to pay transparency. 

Within neuroscience, two dominant themes are emerging: (1) the majority of our social behaviors are driven by our efforts to minimize threats and maximize rewards, (2) our brains treat our social needs much the same way they treat our needs for food and water. Many of our social needs manifest themselves in the workplace, and our behaviors to satisfy these needs, maximize rewards, and minimize threats, are directly observable within organizational life.

David Rock has codified a framework - the SCARF Hypothesis - that argues five aspects of organizational life have a marked impact on we respond. The five aspects of organizational life are:

• Status - the perception of being considered better or worse than others;
• Certainty - the predictability of future events;
• Autonomy - the perceived level of control over one's life;
• Relatedness - the experience of sharing goals with others;
• Fairness - the sense of being treated equitably, especially compared to how others are treated.

I would argue that each of these five aspects is not merely an "extra" or "added bonus" that we would enjoy experiencing in the workplace, but is - consciously or unconsciously - a real need, just like our needs for food and water. 

All of our interactions in the workplace act to either satisfy or deny these five needs. Having a transparent pay process (communicating to employees how compensation decisions are made and providing them with enough information to really understand those decisions) can contribute to satisfying each of these needs:

• Status: In terms of compensation, status can be tricky. A well-designed compensation system should differentiate between employees, providing different rewards for different levels of achievement. In reality, some employees will be better performers than others when objectively measured. Pay process transparency can help to keep the focus on these objective measures, rather than on amorphous or ambiguous rankings based on (in)correct perceptions. If employees understand what objective measures your pay program rewards, then status, as a need, can be re-focused on status relative to objectively measured individual performance toward satisfying performance expectations, rather than on a subjective perception that I received a smaller merit increase than my co-worker because I am subjectively valued by the organization less than my co-worker.  
• Certainty: A transparent pay process helps to manage employee expectations and provides predictability. Having a transparent pay process means that employees understand what is expected of them in order to earn bonuses, merit increases, etc. A little bit of uncertainty can be a good thing. Mild uncertainty triggers a mild threat response and generates just the right amount of dopamine and adrenaline to pique curiosity and motivate individuals to solve problems. Too much uncertainty, however, can generate panic and lead individuals to make bad decisions. Ideally, your employees will experience mild uncertainty about how to achieve what's expected of them, not about what is expected of them or what the pay consequences are of satisfying or not satisfying those expectations. 
• Autonomy: Autonomy and certainty are intertwined; greater autonomy leads to a greater sense of certainty about the future. If your employees do not understand the linkages between performance and compensation, they may feel as though they have no control over what happens to them in terms of their compensation. Without some sense of control over what happens to them, your employees can easily slip into a "flight" response, fleeing your organization in search of opportunities that do provide them with a sense of autonomy. Being transparent about pay can help your employees to see that pay is an output directly related to the inputs of effort and performance they contribute.
• Relatedness: Ideally, all employees should be working toward the overall strategic goals and objectives of the organization. While individual goals may differ, they should all be aligned with organizational strategy to keep everyone moving toward the same things. Being transparent about your pay processes can help employees understand how they each contribute to these strategic objectives, and how those contributions will be rewarded.
• Fairness: If your employees understand how compensation decisions are made, they still may disagree with those decisions, but they are less likely to view them as unfair. Perceptions of fairness are critical; as noted by Rock, "the perception that an event has been unfair generates a strong response in the brain, stirring hostility and undermining trust." If your employees don't perceive that they are treated fairly with respect to compensation decisions, it almost doesn't matter whether you're satisfying your employees' needs for status, certainty, autonomy, and relatedness. The "flight or fight" response will be triggered, and your organization will suffer the consequences of this response in terms of retention and engagement.

Note that all of the above is predicated on the assumption that your compensation decisions are non-arbitrary and based on an articulated set of objective criteria. If your compensation decisions are arbitrary, or you can't articulate the set of objective criteria used in those decisions, you need to address this issue before beginning to think about pay process transparency. 

Taking the time to make sure your employees' SCARFs are organized and addressed with respect to compensation can go a long way in boosting - and maintaining - productivity, engagement and willingness to show organizational commitment.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.