For decades, most U.S. corporations have practiced pay secrecy. They may be forced to release the pay of senior executives, but they work hard to keep secret everyone else's pay. We recently had our annual pay increase exercise at my university and it did a number of things, including hand delivering pay worksheets and emailing password-protected Excel spreadsheets to ensure that the amount of the raises given was a well-kept secret. There are some companies that in the past have even gone so far as to fire employees who have made their pay public.
Why do companies try to keep pay secret? When asked this question, executives usually cite the potential conflicts that might arise and the dissatisfaction that would occur if pay were made public. They go on to point out that they would have trouble justifying some of the pay levels that exist and some of the pay decisions they have made. In other words, secrecy helps them cover up their bad decision-making; and with secrecy, they do not have to correct the problems or defend what they have done.
But does secrecy help reduce the amount of dissatisfaction with pay that exists? It does not! There is a considerable amount of research that suggests that keeping pay secret contributes to greater pay dissatisfaction and worse pay administration.
As far as dissatisfaction is concerned, data that I collected over 40 years ago show that when employees do not know what other people earn, they overestimate what their coworkers earn and end up being more dissatisfied than they would be if they had accurate pay information.
It is also clear that with secrecy, managers can make poor pay decisions because they do not have to defend them. It also reduces the motivation of managers and organizations to adhere to corporate policies and to make good decisions.
In some respects, pay secrecy is particularly dysfunctional in those companies that do an outstanding job of administering pay. All too often, a clear relationship between pay and performance that may be very motivating becomes blurred and unclear because of secrecy. In addition, valuable talent may leave because they think they are paid less than others even when this is not true.
Some companies have made pay public and have actively gotten employees involved in the pay decision-making process. One of the most visible companies with this practice is Whole Foods. It recognizes that employees can responsibly make pay decisions and understand information about how much other employees are making.
If anything, the growth of websites like Glassdoor makes secrecy an even more outdated practice than it used to be. With the salary information that is regularly posted on Glassdoor, individuals can get a considerable amount of information about how their pay compares to others in their company and other companies. What is not clear, however, is whether the information on Glassdoor is accurate. A good guess is that it is on the high side. Thus, the information employees get from Glassdoor may make their own pay look worse than it is, and may cause them to be more dissatisfied with their pay than if they knew what others were actually making. In any case, between Glassdoor and the potential for someone to hack into the company pay system, it is hard to believe that pay is 100 percent secret in most corporations.
One final point about why pay secrecy is an obsolete practice: as already mentioned, when pay is secret, managers are often tempted to make and do make indefensible pay decisions. These decisions, if caught in audits or as a result of individuals sharing pay data, can lead to lawsuits that prove to be very problematic for organizations.
Perhaps the best way to summarize pay secrecy is to say that it has become an old-fashioned, obsolete management practice that has a much larger downside than upside. It is time for organizations to enter the world of pay transparency.
Crossposted from Forbes.com