Transparency Helps Orgs that Pay Employees Fairly

Three Types of Pay Transparency Are Changing the Game

By Daniel Butcher

While there isn’t a nationwide pay-transparency law in the United States—at least not yet—10 states, several cities, and even one county (Westchester, New York) have such regulations. That means organizations may need to adjust how they communicate about pay depending on where they’re based and where they operate.

Academy of Management Scholar Peter Bamberger of Tel Aviv University said one type of transparency is letting employees freely talk about their pay with one another. That’s been protected by U.S. federal law since the passage of the National Labor Relations Act (NLRA) in 1935.

“Most employees don’t know that they have the right to talk about their pay with other employees—that’s part of the NLRA. Still, companies discourage it, and in fact, some companies go too far in discouraging it so that they’re actually breaking the law,” Bamberger said.

“There’s very little merit to stopping employee disclosure, particularly since we now have things like Glassdoor, which really make it easy for employees to find out what others are earning in return for disclosing their own compensation,” he said.

In the second type of pay transparency, employers disclose compensation ranges to current and prospective employees.

“Laws in more than a dozen U.S. states and several cities are pushing for some degree of partial transparency with mandatory employer disclosure of pay ranges,” Bamberger said.“Going beyond that, where it’s not ranges that employers show, but rather actual individual rates of pay, can be potentially risky.

“Our studies have found that letting employees see how much coworkers make tends to have some pretty detrimental effects, whether it comes to malicious envy or even counterproductive work behavior,” he said. “The comp ranges not so much, but revealing detail about how much specific individuals are making can be problematic, so you have to be very careful about how you go about doing it.

“There are some success stories that I’ve written about in a book that I wrote about pay transparency, but it can be problematic.”

The third type is procedural pay transparency, from which Bamberger and his research colleagues have found only positive outcomes.

“That is being open and transparent about every aspect of the pay system in your organization, telling employees about the basis of the compensation structure, for example, what are the criteria for increasing bonuses? How were bonuses calculated this past year? How are differential pay rates by levels in the organization determined?” Bamberger said.

“Most employees don’t have a clue as to what their benefits are or how compensation levels are determined in the organization—employee pay knowledge is really minimal,” he said.

“Where organizations enhance this procedural pay transparency, perceptions of justice and fairness increased dramatically, and that has a wide range of beneficial effects and implications on retention, social exchange and reciprocity among coworkers, and giving back to the organization.”

Pay Transparency Boosts Performance, Retention of Top Performers

By Daniel Butcher

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.

Pay Transparency May Breed Malicious Envy

By Daniel Butcher

Overall, researchers have found that pay transparency benefits organizations with fair compensation structures by incentivizing top performers to continue working hard and reducing turnover of talented contributors. But in certain situations, it can breed envy of high earners and undermine organizational culture.

Academy of Management Scholar Peter Bamberger of Tel Aviv University explained that envy can be either benign or malicious, with benign envy increasing a person’s motivation to help others, while malicious envy tends to decrease motivation. Bamberger said that in cases he studied where pay transparency bred malicious envy among colleagues, the frequency of employees helping one another decreased.

“So if I’m envious of you, and I can see that you’re having difficulties at work, will I help without you coming to me and asking for assistance? Will I come to you and say, ‘Hey, I can see you’re having some problems, here’s advice or some type of information that could help you solve some of the problems that you’re experiencing?’” Bamberger said.

“I’m less likely to do that if I’m feeling envy toward you, and I’m more likely to feel envy toward you under conditions of pay transparency,” he said.

“For people who are natural helpers, it won’t make much of a difference, but for most people, particularly among those who are more competitive or have less prosocial motivation, it can make a big difference.”

Some business leaders and managers complain that transparency is problematic, because it makes people jealous, but Bamberger and his colleagues didn’t buy that argument. Their hypothesis was that people are jealous whether pay is transparent or not, and they imagine what other people’s pay is and base their jealousy on that.

“Whether or not employees see other people’s pay, it’s still a basis for jealousy, because they believe the worst,” Bamberger said. “The difference when pay is transparent is that it’s slammed in your face, and you can’t deny it, and therefore, it’s particularly in that case where the malicious envy can be sufficiently robust to be problematic, while one of these problems was reduced unsolicited helping among coworkers.”

Pay Transparency Reduces Compensation Differentials

By Daniel Butcher

Pay transparency can lead to pay compression, in which employees’ compensation—regardless of whether they’re long-tenured or new, high-performing or just sliding by—tend to cluster around an average or median level for a particular role.

Academy of Management Scholar Peter Bamberger of Tel Aviv University said that people perceive their employer’s compensation structure to be unfair tend to leave the organization. In those cases, pay transparency can interfere with employee retention goals. But he’s found in his research that pay can be a moving target, where pressure to recruit can drive up new hires’ compensation, higher than longer-tenured employees serving in similar roles.

“It’s important to see what the impact of pay transparency is on individual behavior, but we also want to see what happens with turnover rates at the firm level,” Bamberger said. “The argument was based on several research papers in economics in particular with consistent findings that when pay becomes more transparent, it also becomes more compressed.

“Essentially, managers differentiate between stars and poor performers less and give everybody more or less the same or a similar raise and bonus,” he said.

While the economists didn’t really look at the mechanism as to why that is, Bamberger and his colleagues did examine that and came up with a theory to explain the trend.

“The argument is that managers are kind of lazy, and they prefer not to have to deal with an employee coming in and demanding that they deserve more than someone else,” Bamberger said. “So when pay is transparent, regardless of differences in individual contribution, they just give everyone the same level of pay increase or bonus.”

Pay Transparency Can Push Reward Inequities Under the Table

By Daniel Butcher

Performance-based pay—including merit-based salary increases and bonuses—can be complicated by pay transparency rules that make the details known to coworkers, according to Academy of Management Scholar Peter Bamberger of Tel Aviv University.

A reaction to that can lead to pay compression—when wages for low-skilled or low-performing workers and wages for high-skilled or high-performing workers move closer together—or an increase in requests for deals with special perks, also called idiosyncratic deals or i-deals. I-deals are non-standard work arrangements that individual employees negotiate to get remote work or flexibility, training opportunities, special assignments, and even performance benchmarks that would trigger bonuses. I-deals are often used to reward high-performing candidates and employees who have specialized skills in the hopes of retaining them long-term.

“You can imagine, if you’re a star performer and your bonus or merit-based raise is lower than it’s been before, you’re likely to think about leaving that organization and going to work somewhere else—and that’s exactly what some economists have found, that where we have pay compression, the star performers actually pick up and leave,” Bamberger said. “I recently published a paper that also shows the same thing, that pay compression very quickly leads to star performers’ departure.”

So what can organizations’ leaders do?

“What we find is that employees don’t necessarily push for more money; they make their requests for other types of rewards, primarily benefits as part of what we call idiosyncratic deals, things like the number of days per week that they can work from home or the number of weeks per year that they can work from Hawaii,” Bamberger said. “There’s a large body of literature on i-deals in management, and they include various types of benefits packages.

“What we find using data from about 120 organizations in China is that where pay is more transparent, the differentials in the pay of higher and lower performers are more compressed,” he said. “Perhaps because such a situation could drive higher performers to look for alternative employment, when pay was more transparent, employers rewarded the higher performers in other, less observable ways using these idiosyncratic deals. If fact, higher performers asked for these types of deals, and in 50% of cases where they ask for it, they got it.

“What’s actually happening is that transparency is shifting the pay differential from where it can be seen, annual raises and bonuses, to those types of rewards where it’s not transparent, that is, idiosyncratic deals.”

Young Heavy Drinkers in Non-STEM Jobs Earn More Money

By Daniel Butcher

There is no meaningful correlation between levels of alcohol consumption and compensation among early-career professionals working in roles focused on science, technology, engineering, and mathematics (STEM). But heavy drinking is associated with higher pay for non-STEM professionals who are recent college graduates.

Academy of Management Scholar Peter Bamberger of Tel Aviv University said that he and colleagues have researched levels of alcohol consumption and compensation of STEM professionals versus those working in non-STEM fields.

“We were looking at the link between consumption patterns and income growth in the initial years of employment after graduating from college, and surprisingly, what we found is a positive relationship between drinking and income growth in non-STEM roles,” Bamberger said.

“The findings are actually capturing the dynamic that, if you’re not in a STEM job and you want to move up in the organization, you need to engage in these social practices that often revolve around alcohol, and the more you do that, the higher your growth in income is going to be,” he said.

That finding is—at least in part—tied to the prevalence of non-STEM professionals working in sales, marketing, distribution, customer-service, and business-development roles who routinely partake in adult beverages while meeting with clients and prospects.

“A lot of non-STEM people are engaging in marketing and sales and support in building and maintaining relationships with customers,” Bamberger said. “In STEM roles, they’re working in a lab or in front of a computer terminal coding, so there’s less of a role for alcohol as a basis for increasing your salary—drinking is not going to do a hell of a lot for your career if your role isn’t client-facing, right?

“But early-career non-STEM salespeople who drink on the job with clients may be more likely to get promoted and rewarded financially,” he said. “That was the logic behind the research, and that’s what we actually found.”

However, there’s an obvious caveat. Bamberger noted that recent research shows that daily alcohol intake—even in moderate amounts—increases drinkers’ risk of health issues.

“There have been a couple of studies that have come out recently that that directly contradict the line that’s been pushed a lot by a lot of the alcoholic-beverages companies, which is that having some wine with your meal every day is going to prolong your life—it’s healthy,” Bamberger said.

“You’re best off not drinking any alcohol whatsoever, not so much because of its implications on mental health, but rather largely because of its implications with respect to alcohol as a carcinogen, specifically as a leading cause of esophageal cancer,” he said.

“Many younger employees nowadays recognize the risks in drinking; a lot of young people are actually picking up on those problematic implications of drinking alcohol even at the lowest levels and understanding that health risk.”

Sharing Info, Workloads, Positive Feeback Boosts Productivity

By Daniel Butcher

Leaders who can install processes for effective, timely information-sharing, fair workload distribution, and civil communication—including positive feedback—foster the best collaboration and productivity among team members.

Academy of Management Scholar Peter Bamberger of Tel Aviv University said that lackluster productivity is often a result of poor information-sharing and workload-sharing behaviors.

“Team processes are hard; people can’t always pick up the signals that they need to,” Bamberger said. “For example, if they have a piece of information that someone else needs, when should they pass it on to this other person? A nurse has a test result; when should she pass it on to the to the team leader or attending physician?

“If she passes it on too early, she’s going to disrupt what they’re doing, which clearly affects their performance, but if she passes it on too late, it could be deadly, so timing and synchrony of such tasks are crucial,” he said.

Incivility and rudeness also undermine productivity, while civility and kindness tend to boost it.

“In research on medical teams, we demonstrated that when people experience gratitude at work it can often, but not always, have beneficial implications,” Bamberger said. “A lot depends on the source of the gratitude and the nature of the task at hand.

“In one experiment, we had the three teams: a control condition, one that viewed a video before they started the day from a senior neonatologist talking about how grateful he is to everybody in the field for doing the wonderful work they do to save these babies, which had nothing in terms of a productivity boost, but then we had a third group where we had a mother of a preemie talk about how grateful she was to the medical team that saved her child, and that had massive positive effects,” he said.

“We demonstrate what that does to the team interaction through the implications based on a theory in cognitive science called [Fredrickson’s]broaden-and-build, which explains how positive emotions have beneficial effects on people’s ability to be flexible in their thinking, to absorb more information, and things like that.”

Bamberger and colleagues also demonstrate that the effects were much stronger when a mother expressed gratitude than when a senior colleague did.

Sharing positive customer feedback

Business leaders and managers can leverage these insights to improve their effectiveness.

“They can demonstrate gratitude themselves; it does make intuitive sense that if managers and leaders behave with civility and politeness, then that may set an example for the rank-and-file employees to do the same, but they can encourage customers and clients or patients to say ‘thank you’ directly,” Bamberger said. “If you like the way a flight attendant treated you on a flight, you’re supposed to write the company, but what if you were actually put in direct contact with the flight attendant and were able to express the gratitude directly?

“Our evidence suggests that that’s going to have a much stronger effect than a manager saying, ‘You got three positive letters this week,’” he said. “Setting up systems for customers to directly express positive feedback has the potential to significantly boost employee morale and performance.”

Rudeness Doesn’t Motivate Workers—Quite the Opposite

By Daniel Butcher

Some business leaders and managers resort to barbs or even shouting to motivate staff members, but research shows that a coercive leadership style is counterproductive. In fact, civility leads to improved team cohesion and performance, while rudeness hurts workers’ performance.

Academy of Management Scholar Peter Bamberger of Tel Aviv University said that several research papers on the subject explore the implications that emotion-laden events in organizations have on interpersonal relations and team dynamics. In a nutshell, rudeness creates a huge distraction that undermines productivity.

“For example, why can’t you text and drive at the same time? When you’re driving, the reason you don’t text is because—aside from it being against the law—you’re distracted,” Bamberger said. “It’s a complex process to text—it takes your attention, so you have limited cognitive resources, and driving is also complex.

“Whatever goes to the texting is not available for driving, and the result could be death,” he said.

What’s the connection between texting while driving and leadership style, as well as interactions between coworkers? Rudeness and even mild incivility are actually highly emotional events that occur frequently in the workplace.

“Many, many employees experience rudeness at work, and it’s rather ambiguous,” Bamberger said. “It’s not like being bullied or attacked physically, but in response to rudeness, you’ve got to try to figure out what is threatening to some degree, but you don’t know how threatening it is.

“And precisely because of that, and largely unconsciously, your brain is engaging and trying to determine the degree of threat,” he said. “That’s not a mindset that’s conducive to analysis, attention to detail, or any type of thought-demanding work.”

Effective Performance Management Helps with Retention

By Daniel Butcher

The first step for leaders to improve their organization’s performance management is to define it. The next step is to measure it. Further, leaders must ensure that performance-management processes and procedures, including employee reviews and evaluations, are aligned with organizational goals. If done well, performance management can save the organization money by retaining star performers.

That’s according to Academy of Management Scholar Herman Aguinis of at the George Washington University School of Business and author of Performance Management for Dummies, who said that a strong focus on increasing the effectiveness of the organizations’ performance management can not only help them to optimize their talent through targeted skills development and training, but also retain excellent workers.

“If you have a good performance-management system in place, then you talk to employees and make an effort to understand them, you know who your top players and star performers are, and you can anticipate that someone might leave and do something about it before they give notice,” Aguinis said.

Employee turnover is expensive for businesses, with costs ramping up for more senior and high-performing staff members. Costs from employee turnover include recruiting—including advertising, applications, interviews, and onboarding—and training. Administrative costs and lost productivity due to turnover are difficult to calculate exactly, but certainly significant. There are also hidden costs of turnover, for example, culture change, decreased morale and engagement, lost institutional knowledge, potential customer or member dissatisfaction, and even workplace safety problems.

A possible solution? Improve your performance management, align it with the organization’s strategic objectives, identify your top performers, and adjust your discretionary compensation accordingly, then you’ll reduce employee turnover, Aguinis said.

Social-Class Bias Undermines Meritocracy in Promotions

By Daniel Butcher

The role of social class in the workplace is not as discussed as it should be, as it plays a big role in who earns promotions and raises—and who decision-makers include and listen to in meetings. The consequence is that many deserving professionals from lower social classes get unfairly passed over, while those who do get their due in moving up the ladder often outshine their more privileged peers.

Academy of Management Scholar Sean Martin of the University of Virginia explained that social-class backgrounds shape us almost like different cultures. A person who has been upwardly mobile through different social-class positions and professional ranks is akin to being multicultural.

“People who have been upwardly mobile have been shaped in very different ways than people who might have always been in fairly privileged positions, in ways that make them have to learn new cultural norms and reach across cultural divides, as they’ve had to do as they move into new and higher social-class settings,” Martin said. “They come equipped with a skill set, including communication skills, and experiences that are very useful.

“My own research finds that people who come from lower social-class backgrounds who’ve been upwardly mobile are actually quite likely to speak up and offer a fresh perspective,” he said. “The real challenge is that bosses often don’t ask them for their input as often as they would ask it from people who come from more privileged backgrounds.”

People who come from a more elite background typically have many indicators of being from an upper social class, for example, having gone to prestigious schools, saying urbane things that are very culturally savvy in a particular accent that makes them sound smart, and an expensive mode of dressing that is taken for granted in that echelon. And all of those qualities make an impression on supervisors.

“Upper-class people may have that ‘it’ factor—they went to name-brand schools, have name-brand clothes, and say these things that sounds so smart, so bosses say, ‘I’m going to go to them for their input,’ as opposed to a person who might speak more plainly, making the same point but in a very different way, or might have gone to an extremely good school, but maybe not a brand that jumps off the page at you,” Martin said.

“There have been really interesting studies that showed there’s actually a class ceiling and a class pay gap, just like there’s a gender ceiling and a gender pay gap, such that people working the same position who are from a lower social-class background essentially get paid less than a person who’s doing the same job but comes from an upper-class background, so coming from a lower-class background is inhibiting in those ways as well,” he said.

“A lot of my research tries to flip the script and say, ‘Let’s focus on all those multicultural abilities and all the ways that people have been shaped on that upwardly mobile journey that are incredibly useful and valuable, especially pertaining to leadership.”