Cornell University

February 20 2014

Secret Salaries

Lack of transparency hurts worker performance, research shows

Elena-Belogolovsky_200x200If salaries in your workplace are secret, there's more at stake than the frustration of thinking coworkers who produce less than you might be getting paid more.

Research by ILR Assistant Professor and DiPietro Family Fellow Elena Belogolovsky indicates that pay secrecy might also hurt your work performance and prompt top talent to look for new jobs.

In a paper published online in January by the "Academy of Management Journal," she and Tel Aviv University Professor Peter Bamberger '82, M.S. '84, Ph.D. '90 explain why a lack of transparency about pay hurts an individual's performance.

When the payroll is private – causing uncertainty about what workers think the pay range might be – it weakens employees' perception that a performance increase will be accompanied by a pay increase, they say.

Workers also see pay secrecy as a method of managerial opportunism or deception, according to the research, compiled in "Signaling in Secret: Pay for Performance and the Incentive and Sorting Effects of Pay Secrecy."

Belogolovsky, who teaches in ILR's Department of Human Resource Studies, and Bamberger gleaned their findings from experiments with 280 Israeli undergraduates.

All were paid a base salary of $5.70 an hour to play a computer matching game. Half of the participants received information about their bonus pay and the bonus pay of their fellow group members in the experiment. The other half received information about bonus pay only. That half was requested to not discuss any pay-related issues during the experiment.

High-performing participants were more sensitive than others when they perceived that there is no link between performance and pay, researchers said. It follows that pay secrecy may hinder a firm's ability to retain top talent.

When students in the pay secrecy group were told they were being paid based on how they performed compared to peers, performance and retention went down.

However, negative effects of pay secrecy on employee performance and retention thinned when workers were told that performance was assessed objectively on a scale of absolutes, rather than subjectively.  

Even if pay secrecy in isolation does not negatively impact employee pay-for-performance perceptions that an increase in performance will be accompanied by an increase in pay, it can lead to negative behavioral consequences, they said. Decreased performance and increased turnover, for example, can result when pay secrecy is paired with other policies – namely, determination of pay based on what others earn – which raise employee concern.

Belogolovsky and Bamberger also found that subtle "signals" in the way HR policies are communicated and put into practice can influence employees' perception of workplace uncertainty and inequity, leading to poorer performance and higher turnover.