The Unintended Consequences of Pay Transparency: 3 Tips to Handle the Fallout

HR professionals have had to increase their vigilance to pay transparency in recent years.

Between new laws and professional demands, HR often takes the brunt of pay transparency expectations.

And now, researchers have found some unintended consequences of pay transparency that you need to know, understand and likely mitigate.

What Are the Dangers of Pay Transparency?

Under pay transparency laws, companies are generally required to share information about compensation with applicants and employees. For example, you might have to disclose pay ranges in job postings or during the hiring process.

The intent is to help reduce the pay inequities between sexes or pay discrimination based on other protected categories, like age and religion.

But revealing employee pay unexpectedly influences workplace dynamics in several other ways — and mostly not for the good, according to new research out of the University of California Riverside School of Business.

The study’s lead author, UC Riverside Business Professor Boris Maciejovsky, warned: “Organizations should carefully consider the type of information shared with employees, as the appropriateness of this information may depend on the employees’ relative performance.”

Some Must-Follow Pay Transparency Laws

Of course, an increasing number of companies are required to abide by state transparency laws. So for many of our readers, there’s no way to avoid the unintended consequences of revealing compensation and benefits.

(For the latest on the state laws, check out our up-to-date guide: Pay Transparency Laws by State: HR’s Latest Compliance Guide.)

So whether you need to stay compliant or just believe in pay transparency, you’ll want to know what the research revealed and what you can do.

Research: Pay Transparency Changes Expectations

The study, which was published in the Journal of Business Ethics, found that when employees learn how their pay stacks up against their peers, their feelings of entitlement — and the pay they think they deserve — change.

“Transparency is a powerful tool,” Maciejovsky said. “But like any tool, it can have unintended consequences if we don’t use it wisely.”

The breakdown:

• Employees who are top performers — when performance is measured by criteria everyone in the organization knows and understands — feel entitled to significantly higher compensation than their colleagues who ranked lower and peers with similar rankings. So guess what? They’re more likely to demand significant raises.
• Employees at or near the bottom of performance rankings were demoralized when they knew what their colleagues made. In fact, they were less likely to ask for a raise, and even sometimes felt they didn’t deserve a raise. What’s worse, they had little incentive to do better or collaborate with their co-workers.

“Top rankings spur a sense of entitlement to demand more compensation, while lower rankings dampen such a sense of entitlement,” the researchers noted.

Implications of Pay Transparency

The study raised questions about how performance measurement systems and the resulting compensation can impact employee motivation, collaboration and perceptions of fairness.

Transparency laws and practices aim to promote fairness and reduce inequities. But they create unexpected consequences by reinforcing status differences between high and low performers. While the researchers aren’t saying employees should be compensated equally, regardless of their performance, teamwork and collaboration can suffer because of the transparency.

This “highlights a complex interplay between social comparison and individual perceptions of worth,” the researchers noted. “Employees … don’t simply respond to how much others make— but rather, how close they are to being the top performer. That nearness to a high-status benchmark, not just the numbers, drives feelings of deservingness.”

Handling the Fallout

Whether you need to comply with transparency laws or just want to be transparent, you’ll also want to handle the potential unintended consequences. A few tips:

• Stick to it. The researchers emphasize that transparency still has value. It can uncover unfair disparities and help reduce systemic biases.
• Invest in culture. The researchers also suggested companies make efforts to create and support a workplace culture that values growth and contribution across all levels — not just those near the top. Most low performers can be lifted up with training, mentoring and support from their direct boss.
• Assess access to advancement. Regularly review that all employees have equal access to career progression and learning opportunities. You might need to become more proactive about helping underrepresented employees explore career advancement. In any event, be transparent about the steps they need to take for career progression and the skills required for advancement for each position.