Accountability Versus Social Comparisons: a Theory of Pay Secrecy (and Transparency) in Organizations

Matthias Fahn (Johannes Kepler University Linz)
Giorgio Zanarone (Washington University in St. Louis)

Abstract : This paper develops a formal model to analyze how organizations should choose between pay secrecy and transparency. We argue that by preventing employees from monitoring each other’s pay, secrecy reduces envious social comparisons relative to transparency. At the same time, secrecy weakens the employees’ ability to jointly sanction the employer for reneging on promised pay, thereby reducing the organization’s accountability. Thus, secrecy is optimal when social comparisons are pervasive, when employees’ effort is verifiable and does not require implicit incentives, or when bilateral employment relationships are strong enough to enforce implicit incentives. Our model suggests that transparency policies often advocated by consultants and policy-makers may have ambiguous effects on employee motivation and organizational performance, and that one-sidedly favorable or unfavorable views of pay secrecy should be replaced by a case-by-case approach.

The Influence of Pay Transparency on Inequity, Inequality, and the Performance-basis of Pay

Tomasz Obloj (HEC Paris)
Todd Zenger (University of Utah)

Abstract : Recent decades have witnessed a growing focus on two distinct income patterns: persistent pay inequity, particularly a gender pay gap, and growing pay inequality. Pay transparency is widely advanced as a remedy for both. Yet we know little about the systemic influence of this policy on the evolution of pay practices within organizations. To address this void, we assemble a novel data set combining detailed performance, demographic and salary data for approximately 100,000 US academics between 1997 and 2017. We then exploit staggered shocks to wage transparency to explore how this change reshapes pay practices. We find evidence that pay transparency causes significant increases in both the equity and equality of pay, and significant and sizeable reductions in the link between pay and individually-measured performance.