How Should Organizations Draw the Line on Pay Transparency?
There is general support for the widespread practice of disclosing pay data in "bands" associated with jobs. Fewer people would go beyond this to disclose what individual employees make in their jobs. Others would avoid a "one size fits all" approach to the practice of making compensation known. These are the views put forth by participants in this month's discussion of transparency in compensation.
Disclosing pay ranges vs. individual pay has its advocates. Neil Reay suggested that "the narrow target pay range for every position in the company can be made transparent without revealing the exact pay for any person. This can help employees in their career planning and ambitions." Tahoegrrl reminded us: "There are differences in compensation related to scope, role impact, experience, autonomy. These are naturally definers of where an individual should be placed within a salary range. Those differences should be easily explained and verifiable upon request." Dan S. pointed out that disclosing pay ranges "can improve morale, reduce turnover and possibly reduce litigation." He added that it "is helpful in two ways: it quantifies what value the company puts on each function … (and) it allows employees to get a clear idea about where they are within their compensation band."
Those supportive of disclosing individuals' compensation data put forth several arguments. Individual pay transparency would eliminate a source of distraction (Srishti Mehra) and "would do more to eliminate gender and racial pay inequity than any other action," according to Miki Saxon. Will Quandt added that "the practice of having an open book of compensation data … could lead to a different method in solving certain situations such as pay discrepancy …" As Ali put it, "Why companies find it so difficult to talk salary when our government is so open on what each employee is paid is baffling. The experiment with open salaries has been tried and it works."
On the other hand, Kamal Gupta cited problems regarding pay transparency in observing that, "Indian law had mandated public sharing of employee compensation for all those drawing above a certain limit… employees resented this (the old saying, never ask a man what he is earning …). It also made poaching easy." Arun expressed fears that, "people will begin to judge one another by their compensation instead of the value they bring to the company."
Chakraborty went on to suggest that "every organization may like to work out the value of transparency in its own case and determine where to draw the line."
That raises the question: How should the line be drawn on pay transparency? What do you think?
Organizational transparency is a much-contested topic in boardrooms and lunchrooms these days, with two primary questions confronting leaders:
1. How much information should be shared inside the organization?
2. Do we have a choice?
A recent example suggests that the disclosure debate might well be extended to information that generally has been considered off-limits: compensation data.
Recently, film director Ridley Scott had to reshoot scenes in All the Money in the World after star Kevin Spacey was in essence fired following accusations of previous sexual misconduct. Christopher Plummer was hired to replace Spacey and reshoot scenes with co-stars Mark Wahlberg and Michelle Williams, who agreed to return to the set. Their pay was negotiated separately and privately but by representatives of the same agency.
The result, as is widely known now, was that both actors agreed to reshoot the scenes for the actor’s equity base pay of about $80 per day. But Wahlberg’s agent, unbeknown to Williams, negotiated an additional $1.5 million fee. The situation came to light when the negotiation leaked. (The dispute was apparently resolved when Wahlberg agreed to donate his $1.5 million to Time’s Up Legal Defense Fund.)
This Hollywood soap opera raises an interesting question. If the All the Money initial pay arrangements had been known in advance, would an embarrassing situation have been avoided entirely? Are such irregularities waiting to be uncovered in other organizations that don’t make compensation information available to their members?
The case for sharing
Research has shown that information-sharing can aid innovation, foster trust, and contribute to an organization’s agility in a fast-moving competitive landscape. It also can build cohesion among employees and provide them a shared sense of mission.
Vineet Nayar, former CEO of India-based HCL Technologies, is a firm believer in sharing important information throughout an organization. As CEO, for example, he shared his 360-degree performance evaluation from peers and subordinates with HCL’s 50,000 employees as part of what he called “reverse accountability.”
Ray Dalio, founder and head of the highly successful investment company Bridgewater Associates, believes in a practice he calls “radical transparency.” That means “giving most everyone the ability to see most everything… (to reduce) harmful office politics and the risks of bad behavior … more likely to take place behind closed doors than out in the open.” As described in his remarkable book Principles, Bridgewater practices what Dalio preaches, for example, by videotaping all meetings. The tapes are available to meeting participants and others who can then study effective decision-making behaviors (as described by the many principles set forth by Dalio in his book) and, if necessary, resurrect the truth.
In the current climate encouraging increased disclosure, would for-profit organizations be better off emulating their governmental organization counterparts, where compensation is public information, and there are neither secrets nor surprises? In publicly held companies, it would extend a practice already required of the five most highly compensated executives in the organization.
Given Dalio’s devotion to radical transparency, we might assume that he would also be in favor of sharing such things as compensation data. If so, we would be wrong. Bridgewater does not share information when it determines the value of sharing would be low and “the distraction it would cause would be significant.”
This prompts the subject of our conversation today: Should compensation data be shared inside organizations? On what should a decision depend? How far down the organization should such transparency extend? What do you think?
Author: James Heskett
Source: Harvard Business School
Adam Bryant, He’s Not Bill Gates, or Fred Astaire, The New York Times, February 14, 2010, p. B2.
Ray Dalio, Principles: Life and Work, (New York: Simon & Schuster, 2017)
This post was originally published on HBS Working Knowledge.