Salary Transparency + Bargaining Power
A quick word first1
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Want to know what others in your company are paid?2
Some companies trumpet having “salary transparency,” where everybody knows what everyone else is getting paid. But they’re the exception. Many more companies keep people’s compensation confidential. Some even prohibit employees from comparing their pay, or at least they try to do so.
Those contrasting policies impact pay scales in an important (and surprising) ways. They also set the negotiation table very differently for working out a job offer or later, getting a promotion coupled with a raise. We’ll get to those points shortly, but first consider two questions:
1. Would you prefer to work for company with salary transparency? (If you already do, how to you assess the pros and cons?)
2. If you were the head of a company or some division in it, would you institute salary transparency? (If you are such a person, how did you weigh the costs and benefits of that policy?)
There’s a compelling argument in favor of transparency, at least from employees’ point of view. If Person A is just as qualified as Person B and does equally well at the same job, there’s no justification for paying her less.
I say “her” given the long history of lower wages for women even when they are doing the same work as men. (Likewise for discriminatory pay for people of color and other minorities.) That difference for women and minorities impacts them right at the start, and the gap compounds thereafter, even when everyone gets the same annual percentage raiser.
It’s hard to argue against the principle of equal pay for equal work, even if that means employers have to dig deep to bring everyone up to par. And there may be an upside for companies if openness and equality improve morale, and attract a stronger pool of job applicants.
Some companies do regard transparency as a valuable asset. You can go to the Starbucks site and see how wages grow as full-time employees advance from being a team members (who average $30k a year) to team leaders (averaging $57k) to store managers (at $99k).
I’m taking these numbers at face value, of course, and they are averages. A person new to a job likely is paid less; and pay may vary from one region to another. But at least employees get a general idea of the range on salaries and where they may land if they pursue a career at Starbucks.
Whole Foods has posted similar information. And the small social media firm, Buffer, has gone a step further by publishing individual data. According to its website:
“Transparency is one of our core values. We’ve found that it builds trust, holds us accountable, and can push our industry forward. Since 2013, we’ve shared our formula-based approach to compensation, including the complete list of our salaries.”
But other businesses, large and small, are openly hostile to hostile to transparency. In June, the Wall Street Journal reported that some national companies including CBRE, Johnson & Johnson, and McKesson have stated in their job postings for remote workers that they won’t consider residents from Colorado, which just passed a law requiring disclosure.
About twenty other states have enacted similar legislation. Companies that refuse to hire from those places may be significantly shrinking their talent pools in a time when firms are scrambling for personnel.
And here’s the big irony: Companies in states requiring salary disclosure are spending less on wages overall than in other states with no such mandate.
That’s so counter-intuitive, I’ll say it again. My HBS colleague Zoe Cullen, and her co-author Bobak Pakzad-Hurson, have analyzed a vast mine of data, and concluded that transparency laws have enabled companies to set lower salaries, make take-it-or-leave it job offers, and made renegotiation harder.3
Untangling the paradox
The researchers built an economic model that predicted that “transparency reduces the individual bargaining power of workers, leading to lower average wages.” They then tested it by analyzing real world wage data, before and after states instituted transparency mandates.
Yes, person-to-person inequality was lessened, but overall wages went down more than two percent. That may not sound like much, but it’s all on the margin. That’s gravy for the companies, and leaves the employees worse off.4
Cullen and Pakzad-Hurson primarily attribute the effect to a shift in bargaining power. “A key insight is that employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others under transparency.”
It’s the old, “If I do it for you, I have to do it for everyone else” gambit. In a big companies, “everyone else” is a huge number. Yes, Starbucks allows individual baristas to see salary ranges, but those employees have no effective leverage. At best all they can do is try to grasp the dangled carrot of a possible promotion down the road.
In smaller companies, where responsibilities are more fluid, a job applicant or employee can propose tweaking the definition of a role to make it unique and not set a precedent. He or she may also negotiate with the employer for forms of compensation other than salary. More resources to do the job well, for example. Greater flexibility for working from home. Maybe a fast track for promotion. Those items likely won’t show up in the company salary sheet.
Let’s go back to the two questions that I posed at the top:
1. Would you prefer to work for company with salary transparency?
2. If you were the head of a company or some division in it, would you institute salary transparency?
Now that the unexpected impact of salary transparency is clearer, should you flip your prior answers/
As for me, I’m glad that transparency may lessen gender and racial inequality—significantly, I hope. But I’m sorry it may leave workers worse off overall.
Housekeeping
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Photo by Kristina Flour on Unsplash
This piece draws on a longer HBS Working Knowledge article by Avery Forman, “What if Closing the Wage Gap Means Everyone Earns Less?” It also includes some points I made in a LinkedIn article several years ago, “Salary Transparency: Should your Co-workers Know What You Earn?”
See their working paper, “Equilibrium Effects of Pay Transparency.”
The study was confined to the private sector in the U.S. Also, the impact of transparency was less in highly unionized companies.