Work and organisations

(1) For decades, most firms treated individual salaries as confidential, on the assumption that openness would breed resentment. Advocates of pay transparency argue the reverse: secrecy allows unjustified gaps to persist, because employees who cannot see what colleagues earn cannot contest disparities, and managers face little pressure to justify them. Some governments now require employers to post salary ranges in job advertisements, and a number of firms have gone further, publishing every employee's pay internally.

(2) The effects of disclosure have proved more complicated than either side predicted. When pay is disclosed, gaps between employees in the same role do tend to narrow. But the narrowing often occurs less because lower-paid workers receive larger raises than because raises for higher earners slow down. Managers who know that any exceptional raise will be visible to everyone, and must be defended to everyone, grant fewer such raises. Transparency, in other words, compresses pay, and compression can come from the top as readily as from the bottom.

(3) Whether compression is desirable depends on what the original differences reflected. If gaps arose chiefly from negotiating skill, from favouritism, or from the labour market conditions at the moment each person happened to be hired, narrowing them corrects an inequity at little cost. If instead they reflected real differences in contribution, compression weakens the incentive for the most productive employees to stay, and those employees, whose skills are the most marketable, are also the ones best able to leave. A firm that discloses pay may therefore become fairer and less able to retain its strongest performers at the same time.

(4) The practical question, then, is not simply whether to disclose but what disclosure is paired with. Firms that publish the criteria by which pay is set, and not merely the resulting figures, appear to experience less internal conflict, since employees can see why a colleague earns more and can judge whether the reason is legitimate. Disclosure without explanation invites employees to treat every difference as suspect; disclosure with explanation invites them to evaluate it.