Published on: April 4, 2025 at 4:29 pm
Pay transparency laws can motivate star employee stay with companies and boost their performance, while spurring poor-performing working to quit.
Academy of Management Scholar Peter Bamberger of Tel Aviv University has conducted extensive research on pay transparency, including experiments to study the implications of pay transparency and secrecy on turnover.
“We found that pay transparency generated higher retention for higher performers, but other studies done by economists found that transparency is associated with higher rates of turnover, in other words, lower retention—so we have a disconnect there,” Bamberger said.
“But there are some indications that the turnover was higher among low performers, whereas, among high performers, that transparency didn’t generate a higher rate of turnover; in those studies, transparency may not have generated higher retention, like we found, but most of the turnover that those researchers found in their field study was with lower performers,” he said.
In other words, it’s a win-win situation for leaders and managers: Greater compensation transparency does not tend to encourage high-performing (and presumably well-paid) employees to leave the organization, while it does give a nudge to low-performing (and presumably modestly paid) employees to seek employment elsewhere.
“When workers don’t know what their colleagues are making, natural biases cause many to underestimate what we call ‘instrumentality perceptions,’ the instrumental role of extra effort to achieve the right incentive benefits in driving returns,” Bamberger said. “Their motivation is lower when pay is secret, and the result is, over time, a lower growth curve in performance.
“The slope of improvement is flatter when workers don’t know how much money colleagues earn than it is when pay is transparent and they can see how they’re doing relative to others,” he said.
The main takeaway is that pay transparency boosts performance and retention of top performers while leading to turnover of poor and middling performers.
