Salary confidentiality reduces productivity, study shows

‘Don’t ask, don’t tell” is a sacrosanct policy not only in the US army — but in the workplace as well. It’s considered the height of rudeness — and crudeness — for an employee to ask a colleague how much he or she is earning. Those bold enough to ask the forbidden question are likely to be rewarded with reactions ranging from a cutting comment or a dirty look, with the taboo knowledge remaining a mystery.

The only source of information about who makes what is usually the office rumor mill. In the absence of reliable data about salaries, employees gather around the water cooler, giving their best guesses trying to determine how they measure up versus others in the organization — wasting valuable time and energy on worrying whether or not they are getting shafted, instead of trying to improve their performance so they can earn more for the company, and for themselves. As a result, business suffers, with the company the one getting shafted, because workers aren’t giving it their all.

Companies only have themselves to blame for this situation, a new study by a team from Tel Aviv and Cornell Universities shows. When employees are left to rely on the rumor mill for salary information, the study claims, they have a hard time seeing the connection between performance and pay. The more open an organization is with salary data — such as announcing which workers belong to a specific pay grade or range — the better job workers are likely to do, because they will be more likely to believe that doing a better job will eventually pay off.

The study, published by Prof. Peter Bamberger of Tel Aviv University’s Recanati School of Business and Dr. Elena Belogolovsky of Cornell University’s School of Industrial and Labor Relations, was based on the results of an experiment involving 280 Israeli students, who were paid a base fee to play a computer game for one hour. Half the participants were told the amount of the bonus they and their peers would earn, but the other half were told only about the money they were slated to receive — and in addition, they were instructed not to discuss wages during breaks in the game, a condition that was not imposed on the first group. By measuring performance and peer-perception repeatedly over several performance rounds, Bamberger and Belogolovsky were able to reach conclusions about the effect of pay secrecy on performance. The study recently appeared in the Academy of Management Journal.

“Secrecy has a negative effect on worker performance, but not for the obvious reasons,” said Bamberger. “Trust and fairness may be part of it, but we found from our experiment that most of the effect is explained by a reduction in the perceived expectation of additional pay for better performance — for trying harder.”

The results are a revelation for managers, many of whom believe that pay secrecy reduces jealousy among employees, Bamberger and Belogolovsky said. Some companies go so far as to officially forbid discussion of salaries among employees. But especially among younger workers who have grown up in the social media era — where information on even the most intimate subjects is freely shared on social media, and general data on salary information is freely available on the Internet — keeping secrets is counterproductive, the study said.

Part of the basis for the research was a finding from earlier studies that participants who are unaware of what their peers earn tend to underestimate how much successful performers earn, while overestimating how little poor performers earn. “When the economic gap is imagined to be so minimal between good and bad performers, the employee thinks that working harder just isn’t worth the effort,” said Bamberger. “Companies don’t value pay transparency, because it’s thought to weaken overall efficiency.” But the results of the study show just the opposite. “There are no shortcuts in transparency,” Bamberger added.