Does pay transparency help or hurt? Evidence on employee motivation

Abstract

The prevalence of pay transparency has grown in recent years, yet there is limited empirical evidence regarding its potential motivational benefits and costs relative to pay secrecy. Using an experiment, our study investigates the effect of pay transparency on employee motivation while considering two important aspects of the context in which relative pay information is typically provided. 1) Pay transparency reveals pay dispersion which can have different causes: performance-related (endogenous) and non-performance-related (exogenous). 2) Pay transparency is embedded in a broader information environment that often includes relative performance information. Drawing on theory of social comparison and distributive fairness, we predict and find that ultimately the effect of pay transparency on employee motivation depends on the information that pay transparency reveals. Specifically, rather than finding a positive motivational benefit of transparency as anecdotal and initial research evidence suggest, we instead find there are either no meaningful positive motivational benefits or even negative motivational effects of providing pay transparency. By highlighting organizational and environmental factors that influence the effectiveness of pay transparency, our study provides insights on the potential benefits and costs of pay transparency, and thus adds value to the on-going debate over pay transparency versus pay secrecy.