What happens to pay allocation when wages becomes transparent?

Tracking salaries and performance outcomes of close to 100,000 US academics over two decades, our latest research finds that pay transparency leads to more equitable and equal wages but also to reduced power of performance-based incentives.
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Over the past decade pay transparency—the broad disclosure of individual pay—has been widely advanced as a remedy to the inequitable and increasingly unequal allocation of pay, including notably a persistent gender pay gap in organizations.  Advocates of pay transparency argue that disclosure of individual pay levels pressures organizations to remedy unjust or unequal treatment across employees. Despite such advocacy of the practice, organizations have largely resisted this form of pay transparency, with many actively discouraging any form of pay disclosure to peers within organizations. Arguments opposing pay transparency suggest it will generate a heightened level of dysfunctional social comparison that undermines individual and organizational performance. It may specifically dampen the capacity of organizations to to link individual pay and performance, thereby compromising efforts to effectively motivate employees and attract and retain talented ones. 

We recognized that these debates were playing out with rather little empirical data on the topic. This lack of systematic empirical examination was somewhat understandable. To evaluate the impact of pay transparency of these outcomes demanded unusual data—a series of organizations that experienced abrupt shifts to increased pay transparency, as well as individual and organizational level data on pay practices and individual performance both before and after these changes in pay transparency.

We noticed that in the US, public universities and their academic departments had experienced precisely such pay transparency shocks that played out state by state, as some entity within each state, often a newspaper, published a searchable website that made individual salaries suddenly rather easily visible to all.  We also recognized that we could both assemble individual productivity data for these employees, and through Freedom of Information Act (FOIA) requests to each state or university potentially gather salary data both before and after these transparency events.

Our recent Nature Human Behaviour paper (https://www.nature.com/articles/s41562-022-01288-9) reports on our empirical conclusions from assembling and analyzing precisely such data.  With these data, we test the systemic consequences of pay transparency on pay equity, including gender pay equity, pay equality, and the link between pay and performance. Tracking wages and productivity of almost 100,000 US academics across eight US states over two decades we find that:

  • Transparency substantially reduces the gender pay gap as well as other forms of pay inequity. The effects are sizable; we can attribute up to 50% of an observed reduction in gender pay gap in some institutions to increased transparency in wages.
  • Transparency substantially reduces pay inequality. This is distinct from its effect on inequity, and we show that transparency results in up to 20% reduction in differences in pay across individuals within academic departments and institutions.
  • Transparency substantially reduces the link (the slope of the relationship) between pay and performance measures. Across performance metrics (such as publication of academic articles, books, grants, etc.), we find that salaries become less sensitive to these measurable outputs.

 Digging deeper into the mechanisms behind our results we find that, in response to transparency shocks, institutions substantially alter their wage adjustment policies. In particular, they grant larger pay increases to those who we identify as unfairly underpaid. While pay transparency may also affect mobility, we do not find this mechanism explains our findings, thus suggesting that these increases in pay equity and equality result from pay policy changes rather than mere selection. While much remains to be done to understand the consequences of pay transparency for individuals and organizations, our results suggest that in the context of academia in the US, pay transparency has a rather systemic and sizable effect on the structure of pay.

Our results do not provide any simple answer to the debates surrounding pay transparency that prompted our inquiry. Pay transparency appears to pressure those who assign pay to more aggressively remedy inequities in the allocation of pay, granting larger pay increases to those who, based on their performance and rank, are unfairly underpaid. The result is that the performance- and promotion-conditioned gender pay gap is significantly reduced, and pay generally becomes more precisely predicted by observable performance measures.  Pay transparency also appears to pressure those responsible for allocating wages to simply make pay more equal, independent of performance. Pay becomes more compressed and department and institution affiliation predict a larger portion of pay variance. 

At the same time, in response to pay transparency and consistent with pay becoming more equal, academic departments and universities significantly weaken the link between pay and a range of observable performance metrics.  In addition, the marginal returns to advancements in academic rank become significantly smaller. In summary, the response to pay transparency is that pay becomes more equitable and more equal, but also less performance- and promotion-based.

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