Knowing how much money other people make would benefit workers and make the labor market more efficient
Are you paid fairly? Do coworkers at your level make more or less money than you do? How much would you make if you got a promotion? If you took a job with a competing company, would you make more money? Many Americans, possibly the vast majority, don't know the answers to these questions. For decades pay has been something whispered from employer to employee. But keeping it secret might do a disservice to workers, managers, and broader economy.
Economists love to talk about transparency. According to theory, if people have more information, then they can make better decisions. That makes for a healthier, more efficient economy. Why should pay be an exception to this rule?
The Shining Example: Wall Street
If you look to industries where compensation is common knowledge, then you find employees that have far better success achieving more pay. One clear example is Wall Street. At investment banks, salary transparency isn't encouraged, but bankers and traders just can't help themselves. After all, many are obsessed with money. So come bonus season, they compare packages and relay information from firm to firm. Industry publications even include league tables to show which banks pay better than others.
Salary transparency is also quite strong among chief executives across the economy. Public companies are required to report this information. Is it any coincidence that executive pay has been rising over the past few decades? Each CEO wants to be paid above average, so pay ticks up.
Salary Secrecy May Make Inequality Worse
Of course, salary transparency won't suddenly make all industries as lucrative as working as a banker or CEO. But lacking information on pay could result in workers making less money than they should be. Salary secrecy may make inequality worse.
Linda Barrington, an economist and Managing Director of the Institute for Compensation Studies at Cornell University's School of Industrial and Labor relations, worries that wage transparency in some groups but not others widens inequality. In fact, this could be part of the reason for why CEO compensation has risen by so much while the pay of most other workers has risen by so little.
But she also doesn't see salary transparency as a silver bullet for better income equality either. "Transparency creates pressure for more equality within a group, but not necessarily across a group," she says. More information on pay across the economy might not move the bottom quartile of wager earners significantly nearer to the top quartile, for example. But it could prevent one group that has transparency, like CEOs, from pulling away from the rest of the pack that lacks information on pay.
A Win-Win Situation for Employers and Employees
Even if compensation transparency doesn't cure inequality, however, it could make the labor market more efficient. Economists David Card, Enrico Moretti, and Emmanuel Saez from Berkeley and Alexandre Mas from Princeton, recently published a research paper that examined what effects more information on pay has on worker satisfaction. In California, all state employee salaries are public information. The researchers informed University of California employees of a website containing this information and analyzed their job satisfaction after those workers obtained pay information.
The results were what you might expect for those whose pay was below average within their peer group: they weren't thrilled. They were more likely to be unsatisfied with their pay/job and search for new work. The worse the individuals' pay was relative to the median, the worse their satisfaction. Those at or above the median, however, experienced no change in job satisfaction or job search intention.
These economists conclude that pay transparency just makes workers who are on the low-end of the pay scale feel worse about their jobs, so it accomplishes little. Linda Barrington notes, however, that this contention misses a benefit of being unsatisfied: the likelihood of moving on.
In theory, those who are paid less than their peers are likely to be poorer performers. Since managers want strong performers, these people would likely be better off -- from both their standpoint and that of management -- to look for work elsewhere. Their talents and abilities might be better suited to another job, which would match that improved performance with better pay. The previous employers could also then find new employees for the newly vacant positions who could better fit their mold and meet their expectations.
Then, Why Don't Companies Seek Better Transparency?
So we have learned two things: salary transparency might help to prevent inequality from worsening and it will make the labor market more efficient. These benefits are potentially pretty significant -- so why are companies keeping salaries secret?
The most cynical explanation is that management wants to keep down compensation levels. Ultimately, worker salaries are just another cost. Firms care a lot about controlling costs. As a result, they would seek to pay workers as little as possible. By keeping salaries secret, workers are less likely to be angered over poor pay, demand a raise, or flee to a competitor. These actions would all force firms to increase wages.
Another potential explanation, one which firms often use as their official reasoning, is that they are trying to protect the privacy of their employees. You might not want others to know how much money you make. Of course, this is simple enough to get around: make salary disclosure up to the employees to share. Even only 25% did, that could provide enough information to educate workers on fair pay.
Barrington suggests that some companies might want to keep compensation secret because they are afraid they are doing something wrong. "If there is capriciousness or incompetence in their practices, they'll get sued," she says. This is a harder problem to get around, but perhaps laws could provide some latitude to firms willing to allow workers to share pay by only allowing compensation lawsuits to succeed that display malicious intent or some other high standard for wrongdoing.
Finally, firms might also have a strategic concern: some consider their compensation structure a trade secret. Indeed, today you see salary non-disclosure requirements often included in confidentiality agreements that new employees are forced to sign. While there might be some situations in which salaries are a legitimate trade secret, strategic importance surrounding salary is more likely the exception than the rule. If a certain set of skills and experience has a market-based wage, then any variations on that wage will be slight and shouldn't provide a huge competitive advantage to a company.
Will The Law Even Allow Salary Transparency?
Such confidentiality agreements, however, raise an important question: is it even legal for employees to disclose their salaries if they choose to do so? This might seem like a First Amendment right. Isn't it just freedom of speech?
Unfortunately, Americans have no such right when it comes to pay disclosure. If an employer imposes restrictions on employees revealing their compensation, then the First Amendment doesn't apply, according to University of Chicago Law Professor Richard Epstein. "Public enforcement of private rights does not make for public rights," he says. The exception to this rule would only be racially restrictive covenants in a contract.
So in cases where firms claim that compensation is a trade secret, salary confidentiality would be protected. But as a public policy matter, states could decide to alter this precedent. In California, for example, the law dictates that salary disclosure is a part of free speech.
In Fact, the Effort Has Already Begun
States can provide employees the right to disclose their pay, but only a handful of employers contractually force employees to keep their compensation secret. And few employers would actually go after employees who publicize their salaries. So better pay transparency is certainly possible.
In fact, the Internet makes it easier than ever to gather information on salaries. The website Glassdoor.com is actively providing this service to its users. It provides the ability to search for jobs, read company reviews by employees, get interview tips, and see what companies pay for different positions.
The information is all provided voluntary, by the users themselves. It is also anonymous. The site has developed a slick "give-to-get" model, where those who use the website are asked to share some information about their past or present employers to read what others have said.
Since the service launched in 2008, users have embraced pay disclosure, according to Tim Besse, Vice President of Product and Marketing and one of the site's co-founders. He says that people are more likely to leave a salary report than to write a company review, since providing salary is so easy. This is a service that users find very valuable, Besse says. He notes a study showing that 60% of employees wish they had more information about what constitutes fair pay. As of May, the website had nearly 1.2 million salary reports.
Salary transparency will be an interesting trend to watch over the next few decades. We could see a dramatic shift in its favor. The Facebook generation has a far more liberal attitude towards sharing personal information than previous generations. As it begins to dominate the workforce, more pay disclosure could become very common. If it does, the economy will benefit. Even employers may learn to love pay disclosure once they begin to experience a more efficient labor market.
Image Credit: bigburpsx3/flickr
This article available online at: