Pay secrecy

Friday 10 January 2020

Adrian Furnham

Being secretive about pay can bring a host of challenges for companies. But so can full transparency, writes Adrian Furnham

Take a look around you. Do you know what the person who sits next to you is paid? How about your colleague from across the floor? Pay disclosure has always been a key issue in employer/employee relations, and the decision to disclose, or not disclose pay can have wide-ranging consequences.
 
For employers, the issue is about pay communication. Pay communication refers to if, when, how, and which pay information (pay ranges, raises, averages, individual pay packages, and/or the entire pay structure) is communicated to employees, and even the general public. Both of the extremes of pay communication practices (pay secrecy and pay openness) consist of two aspects: organisational restriction and employee restriction. Organisational restriction refers to the amount of pay information the employing organisation gives to employees. Employee restriction refers to the extent to which employees are permitted to discuss their pay.

Your Choice

Does your organisation have transparency as a core value? And what is your policy with regard to pay communications? Do people know how much each other is paid? And what are the consequences of openness or secretiveness in the reward package? Are employees discouraged or prohibited to disclose their pay? What can companies do legally?

Consider the following situation: you have started your own company employing 100 people at various levels. Data protection and confidentiality aside, you have four options with regard to the openness of salary (or full remuneration) disclosure:

A. You are completely transparent: full details of the (total) remuneration package are known to all within the company.

B. People know salaries in narrow bands: You are able to determine salaries in a specific range i.e.  £30,000-£35,000 or £60,000 to £65,000.

C. People know salaries in wide bands: Like the above but now the rage is wider (£30,000-£40,000), perhaps even wider (£60,000 to £80,000).

D. Total secrecy: Nobody knows the salary of anybody else and are forbidden (on threat of sacking) to disclose their salaries.

Which would you choose for the benefit of all involved?

Justice and Fairness

There is a celebrated historical case. Nearly 100 years ago an American company suddenly notified their staff that they were not allowed to disclose salaries to each other. The staff objected and supposedly walked around their building with large signs around their necks showing their exact salaries.

The pay issue provokes emotions around fairness and justice. It goes to the very heart of what people feel is fair and just. Researchers in the area have distinguished between different, but often related, types of justice: 

  • Distributive Justice: the fairness associated with decision outcomes and distribution of resources like pay. 
  • Procedural Justice: the fairness of the processes that lead to decisions. 
  • Interactional Justice: the treatment that an individual receives as decisions are made.
  • Interpersonal Justice: perceptions of respect and treatment.
  • Informational Justice: the adequacy of the explanations given in terms of their timeliness, specificity, and truthfulness

All of these sources of justice can be involved in pay communication, which makes the whole business so fraught with emotion. The problem with determining salaries is manifold. Output and productivity are often hard to measure, and may not reflect the true value of the employee to the organisation. So, does pay secrecy lead to lower motivation and satisfaction or the other way around? There have been studies on this topic. They tend to show that secrecy is prevalent in most organisations and that workers actually want it, though to prohibit discussion may even be illegal.

Research

Some years ago in the Academy of Management Review Paper (Vol 32, 55-71) four American business academics looked at the costs and benefits of pay secrecy. They argued that there were various costs as follows:

  • Employee judgements about fairness, equity and trust, suggesting these may be distorted.  If people do not know the salaries of colleagues, they infer or guess them.  Incomplete data, or secrets, can generate anxiety and vigilance about fairness.  People may believe that if information is withheld it is for a good, though probably sinister, reason. This may affect three types of justice judgements: informational (it being withheld); procedural (lack of employee voice and potential bias) and distribution (compressing the pay range).
  • Judgements about pay fairness will be based on a general impression of fairness in the organisation.  People see may things like hiring, firing, perks, and awards that are dramatic and memorable as examples of “fairness”. Thus if they have a “fair but secret” pay policy, it will be judged unfair if other, perhaps unrelated, actions do not look fair. The nature and context of the contract is everything.
  • Secrecy breeds distrust while openness signals integrity. Secrecy can signal that the organisation does not trust its employees, and can reduce motivation by breaking the pay for performance linkage.
  • People perform best when given goals/targets/key performance indicators, which are explicitly linked to rewards. If they do not know the relative worth of the rewards because of pay secrecy, they may well be less committed to their goals and targets.
  • Pay secrecy can also affect the labour market because it can prevent employees moving to better-fitting and rewarding jobs. Pay secret organisations may not easily lure or pull good employees from other organisations.  

But on the other hand, pay secrecy can deliver real advantages to the organisation:

  • Secrecy can enhance organisational control and reduce conflict. Pay differentials can and do cause jealousy, debate and disenchantment. Making pay open often encourages managers to reduce differences: the range distribution is narrower than the performance. So, paradoxically, secrecy increases fairness in the equity sense, because people can more easily be rewarded for the full range of their outputs. 
  • Secrecy can prevent or mitigate “political” behaviour. Openness is both economically inefficient and likely to cause conflict.
  • Pay secrecy allows organisations more easily to correct historical and other pay equity anomalies. Thus managers can both minimise unfairness and discrimination as well as perceptions of those matters more easily by secrecy.
  • Secrecy benefits team work, particularly in competitive individuals, organisations and cultures.  It encourages interdependence rather than “superstardom”.
  • Secrecy favours organisational paternalism because employees themselves (perhaps unexpectedly) want secrecy, and to reduce conflict, jealousy and distress at learning about others. It can even be suggested that workers might make irrational decisions if they know what their colleagues are (really) paid.  So paternalistic secrecy increases control and the “feel good” factor.
  • Secrecy is another word for privacy, which is of increasing concern in a technologically sophisticated surveillance society. Perhaps this is why surveys show people are generally in favour of secrecy, because they do not want their own salaries discussed by their co-workers. People are willing to trade-off their curiosity about the pay of others for not having their own package made open.
  • Secrecy may increase loyalty - or put more negatively - create labour market immobility. If people can’t compare their salaries, they may be less inclined to switch jobs to those which are better paid.  So you get what is called continuance commitment through lack of poaching.

Clearly the cost-benefit ratio of openness to secrecy depends on different things. Much depends on the history of the organisation, and equally  on whether good, up-to-date, accurate, industry compensation norms really exist.  What is - on average - a senior partner in a law firm, a staff-nurse, or a store manager paid? What about an accountant, a security guard or an IT specialist? The public industry norm information can, and does have a powerful effect on organisations that opt for secrecy or privacy.

One issue is how the organisation does or claims to, determine criteria for pay allocation. Do they increase payment for years of service, for level/rank, for performance on the job, or for some combination of the above, or something else?  The more objective the criteria such as that seen in sales - perhaps the easiest job to assess number of calls made, number of widgets sold, the more difficult it is to keep things secret. 

And when appraisal systems strive to be objective, equitable and fair then arguably there is less need for secrecy. Where objective criteria are used, will staff have less concerns for secrecy?  Subjectivity and secrecy are comfortable bed-fellows.  When their pay is secret people have to guess how they rank relative to others at the same level. That, no doubt, is why high performers want secrecy more than low performers. They believe they are equitably being paid more, and want to avoid jealousy and conflict. If you believe you are well paid because of your hard work then all is well with secrecy.  But what if you don’t?

Changing the System

When pay secrecy is abolished, some people not only feel angry, they feel humiliated by exposure to relative deprivation. They feel unfairly dealt with, and their easiest means of retaliation is inevitably to work less hard. People can adopt a range of retaliatory processes, particularly if they know the organisation well and know “where the bodies are buried”.

Pay secrecy relates to an organisation’s vision and values, as well as individual job motivation. Secrecy can lead to more management control, bigger differentials and less conflict.  But can you enforce it?  Paradoxically the more enthusiastically an organisation tries to enforce secrecy, the more employees might challenge the notion. Individuals and groups chose to talk or not, in details and in generalities. Perhaps younger and less well paid people are the most likely to “spill the beans”

Finally pay secrecy may not always be “in the gift” of the organisation. There are rules which govern it. Perhaps the most interesting and unusual situations can be found in Norway and Sweden.  There you have the right and the ability to look up everybody’s full (and hopefully honest) tax return. Thus you can know the exact salary of everybody in your organisation and that of your competitors. There is no legal possibility of secrecy. This state of affairs results from many things, not least of which is the national culture and the fact that wages (and taxes) are high and differentials are low.

Imagine the fun of looking up the guests after a typical middle class dinner party. It is particularly interesting if the bravado about houses in France and the Caribbean are justified. And it seems often the quiet diffident ones are the richest of all.

On this topic of transparency, one amusing change that has occurred in Norway is that you can now you can look up who has looked you up. This is probably meant to discourage a prurient form of voyeurism which can’t be good for anyone. Though of course one can pay others to do this and so remain anonymous. Surprising how strange situations like this can generate jobs, and sometimes unintended consequences.

Conclusion

One can be very clear about three issues:

Once you have abolished or reduced secrecy the path back is near impossible. It really is a Genie and Bottle issue. And it may become inevitable as legislation is “drifting” towards full openness. Secondly, if your major competitors have a policy of openness, and you have one of secrecy, this might undermine your system. There are “industry standards” which you need to be aware of. Finally, for total or even partial openness to work, you need to be pretty clear in explaining the criteria for determining pay at all levels. You need to be able to explain and to defend your system: why people are paid what they are paid. Otherwise you open the most undesirable evil can of worms!

Where possible many firms opted for a quiet life, where because of a taboo about money-talk, no one knew or enquired about salary or remuneration difference. This allowed all sort of peculiarities and injustices to occur for years. Now bright lights peer into this murky darkness and a lot of explaining has to be done.

 

Adrian Furnham is principal, behavioural psychologist at Stamford Associates in London.  He is also professor of psychology at BI, The Norwegian Business School. He is the author of over 90 books, including The New Psychology of Money. 

 

Related Articles

Mar 2020 » From the Archive

From the Archives: Behavioural finance and economics

Mar 2020 » Careers

Career Dilemmas: how do I move roles within my firm?

Mar 2020 » People

Profile Anna Macdonald, CFA

Mar 2020 » Behavioural Finance

Narcissism and overconfident investor

Dec 2019 » Careers

Got a problem? Ask Liz

Nov 2019 » Careers

Got a problem? Ask Liz

Oct 2019 » Behavioural Finance

Physician heal thyself

Oct 2019 » Careers

Got a problem? Ask Liz