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