Pay transparency has been a growing trend in recent years, with companies like Starbucks and Whole Foods both engaging in the practice.  While advocates suggest that the practice helps to improve pay equality, research from Harvard Business School suggests that it might not actually be the case.

Pay disclosure has been enshrined in the law of 10 European Union countries in the hope that doing so will give employees more bargaining power.  The study suggests, however, that far from improving wages, it has actually resulted in a loss of up to 3% of pay as companies make lower offers and are more likely to hold firm on those offers during negotiations.

Pay transparency

The researchers collected data from the American Community Survey, which has information on the wages and employment status of over 4 million people who live in states with transparency laws.  The data reveals that in the year after the laws were passed, wages fell by 2.2%, and after three years had fallen by 2.6%.

Research from UC Berkeley highlights that such schemes can also have unintended consequences.  The researchers analyzed a few thousand employees at a large Southeast Asian bank.  The employees were asked to guess the salary of both their peers and their manager.  They then monitored the work habits after they were actually given the information.

The study found that when we learn what our peers are earning, we appear to become less productive, especially if it transpires that our colleagues are earning more than we think they should be.  This chimes with previous research from Yale, which found that pay transparency can harm collaboration.

“In our experiments, making wealth visible was a very corrosive force; doing so reduced cooperation and widened economic inequality. It resulted in the rich exploiting the poor,” the authors say.

Bosses pay

Interestingly, however, the Berkeley researchers found that employees seemed to work much harder when they learned that their bosses were earning more than they thought.  Indeed, the data showed that when our peers’ salary was 10% higher than we thought, we reduce our hours by over 9%, when managers’ pay was 10% higher than we thought, our hours would raise by 1.5%.

“It was not uncommon for employees to find out that some of their bosses got paid three, four, five times as much as they do, sometimes 20 times as much,” the researchers say. “What shocked us was that when you compared yourself to your peers, small pay differences demotivate you. But when you find out your bosses make an obscene amount more than you make, you don’t care. If anything, you become more productive.”

This boost appeared to be greatest for managerial positions that were a few rungs up the ladder than the employee concerned but faded considerably for the most senior positions.  This suggests that there is a motivational and aspirational element to knowing the managers just above us are earning a lot as we believe we might one day hold those positions, whereas the most senior posts seem more unattainable.

“There is a widespread view that forcing firms to be more transparent would reduce pay inequality,” the researchers explain. “Our findings suggest that these policies may be effective, but in a narrow sense: While transparency may pressure firms to reduce horizontal inequality (between peers), employees are unlikely to exert the same pressure to reduce vertical inequality (between employees and managers), which constitutes the bulk of pay inequality.”

How pay transparency makes us feel

A second study from Berkeley used the Norwegian example to explore just how pay transparency makes us feel.  For some time Norwegian tax records have been a matter of public record, so you could, if you so wish, see how much your friends, neighbors, and colleagues earned.  Since 2001 this process of snooping was made that bit easy by moving the records online.  Similar laws exist in the other Scandinavian countries, and they have prompted much debate about the ethics of such a policy.

The study reveals that, perhaps unsurprisingly, the vast majority of visitors to the various websites allowing people to snoop on people’s income were doing so to do precisely that.  It wasn’t a case of uncovering corruption or tax evasion or other forms of public interest investigation, but rather seeing what friends and colleagues earned.  Indeed, the practice became so pervasive that the Norwegians started to refer to it as ‘tax porn’.

The practice was supported by a range of apps that brought out the nefariousness in people, with tools allowing leaderboards of your social media friends to be created based upon their income, or a map showcasing the income of those around you.

Making us happy

The researchers hypothesized that poorer people stand to lose more via this comparison, not least as relative poverty measures highlight the relative lack of wealth people have compared to those around them.

The hypothesis was tested by measuring the role income transparency played on the happiness of people, and specifically the relationship between income and happiness.  In other words, did knowledge of their position in the income distribution affect their wellbeing?

Data on happiness and life satisfaction were collected between 1985 and 2013, and the analysis found that the 2001 digitization of the tax transparency process resulted in a 29% increase in the relationship between happiness and income, with a 21% increase in the relationship between life satisfaction and income.

Knowing our place

The role knowledge of our relative income played in our happiness was confirmed by the fact that the happiness-income relationship remained constant in the years prior to 2001, and after they leaped after the change in policy, remained at that elevated level for the next 12 years.

This was confirmed because, among people with minimal access to the Internet, their happiness-income levels remained at pre-2001 levels even after the change.  What’s more, a similar analysis of happiness-income relationships in Germany, where no such pay transparency is present, showed that it remained stable over nearly 30 years from 1985-2013.

Perhaps the key to whether pay transparency is effective, therefore, is whether people feel that they can climb the ladder and achieve the social mobility required to earn the higher wages of those around them.  If they feel such upward mobility is not available to them, then pay transparency may do more harm than good.