In recent years, we have heard some people advocate for pay transparency in organizations. The recommendations in this regard have received a great deal of publicity, with arguments for and against the concept being made in the press. Now we have a well-crafted research study that examines the topic. How does knowledge about fellow employees’ salaries affect a worker’s motivation and effort? Zoë Cullen and Richardo Perez-Truglia examined this question in a paper titled, “How Much Does Your Boss Make? The Effects of Salary Comparisons.” The scholars conducted a study of over 2,000 workes at a large commercial bank. They discovered that knowledge about your manager’s salary can enhance your motivation. However, having salary information about your peers can be demotivating. Here’s a summary of the findings from HBS Working Knowledge:
The research results were sometimes counterintuitive, Cullen says. For example, employees worked harder after discovering how much their managers made. For every 1 percent higher in the perceived salary of a manager, employees clocked 0.15 percent more hours.
But the employees’ extra effort diminished as the difference in rank between employee and manager widened. In some cases, “We were looking at how employees responded to managers who were five promotions away and who they explicitly thought were in positions they themselves would never achieve,” Cullen says. In those cases, the work-harder reaction was much smaller but did not become negative. When employees received salary information about managers who were closer to their own rank, they may have found the salary difference aspirational—just a promotion or two away, she says.
While knowledge of managerial compensation seemed to coax more effort out of workers, the exact opposite happened when employees learned what peers were making. For every 1 percent higher salary a co-worker earned over the employee’s expectation, they worked 0.94 percent fewer hours, the researchers found.
In a global environment where companies are scrambling to find qualified workers to fill vacancies, another important finding emerged. When an employee learned a co-worker’s salary was 1 percent higher than estimated, chances rose by 0.225 percent that they’d leave the company.