In Praise of Salary Disclosure (2016 Feb)

by Barry A. Liebling

Salary secrecy is a long standing practice among companies that have more than a few employees. Here is how it works. Each employee knows his or her own salary, but is not informed by management what other employees are making. In many firms it is considered a serious breach of conduct for workers to swap information regarding salaries. Only top management and some human resources professionals have access to the roster of how much each person is paid.

Of course workers are curious about how their pay compares to that of their peers. And rumors inevitably spread (some accurate, some mistaken) regarding everyone’s compensation. Employees are motivated to ask for a raise when they believe their pay is unjustifiably low in relation to their colleagues. But instead of asking for more money, they frequently decide to jump ship and look for another job elsewhere because they anticipate they will be refused.

The Wall Street Journal recently reported that there is a new trend – small now but with the potential to grow – of companies abandoning secrecy and disclosing all salaries to each employee.

If you were to start a company from scratch (no tradition of either salary secrecy or salary disclosure) which policy would be the better choice? On balance, full disclosure of everyone’s pay has a lot of merit.

Consider what the root of the salary secrecy policy is. Business owners reckon that it is advantageous to them if only they know how much each of their employees is being paid. By keeping this information to themselves owners think they are in a better bargaining position and can persuade potential employees to join the company for less money. Furthermore, the secrecy policy makes it difficult for existing employees to gauge how much of a raise they could get their boss to agree to.

But the information-power owners have through salary secrecy has negative consequences. It discourages trust. Making pay information “officially confidential” (but still knowable to people who want to find out) suggests to employees that the owner is not on their side. It is a clear signal that workers and management are adversaries (at least with respect to pay negotiations). Irritated employees will attempt to “get even” by withholding all sorts of information they suspect their bosses would like to know.

What is likely to happen if all salaries are disclosed to everyone? In this scenario workers have one less reason to suspect that management is deliberately trying to hide things from them. And making pay transparent encourages management to develop and maintain a rational, defensible system for determining each employee’s compensation. When all information is available to everyone there is a strong incentive for the owners to get things right and to explain the reasoning behind their pay policies. By contrast, where pay is “officially confidential,” capricious, foolish discrepancies in compensation can go undetected (except by top management and human resources executives) for a long time.

Notice that having a policy of disclosing compensation does not determine exactly how management will decide to pay employees. There is a wide range of possibilities that might work for various companies that have different environments and diverse objectives. Sales positions are typically paid on commission, and it is relatively easy to understand the basis of each person’s pay. By contrast, many jobs have outputs that are subtle and more difficult to measure objectively. The Wall Street Journal article cited above describes situations where employees vote on one another’s pay raises. With full-disclosure on compensation one size does not have to fit all, but each size should make sense to the key participants.

One downside to a full-disclosure pay policy is that it will be uncomfortable to some employees who are accustomed to salary secrecy. I am acquainted with people who are shy, crave privacy, and would prefer that their coworkers not be informed about how much they are being paid. This suggests that moving a company from the traditional policy to total transparency can be challenging. Still, the benefits of showing everything – all cards are on the table – might be worth the short-term discomfort during the transition.

Be aware that the key to the potential success of salary disclosure is its voluntary nature. Some business owners will try it out and discover how well it works. Others will stick to the conventional secret-salary model. Over time more will be known about how transparency contributes to (or can detract from) business success. What is not needed is the meddling hand of government. You can anticipate that there will be observers who approve of the full-disclosure pay policy and jump to the fallacious conclusion that there “ought to be a law.” Using coercive force to enact a business practice is a sure way to spoil it.

Salary full-disclosure has attractive elements, and experiments are being done in real companies to determine how it can benefit both business owners and productive employees. This is a case where it is time to reconsider a long standing tradition and replace it with something better.

*** See other entries at in “Monthly Columns.” ***

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