Why is there a stigma in corporations against revealing hourly rates and salaries? Anyone implement "transparent salaries" policy?

Question

I always wondered about the stigma against revealing hourly rates and salaries to coworkers.

I just started a company and we made a "transparent salary" policy where everyone knows exactly how much they make. At any point we encourage our employees to ask for a raise and to justify WHY they should get one. We encourage conversations that start as “I see that Dev B is making $80/hr and I make $50. I also see that the project I’ve worked on has made 50% profit. I believe I deserve a raise”. At that point we will either agree, yes you do deserve a raise, and give it, or explain to them why we can’t afford/justify the raise and specific actions THEY can take to get a raise. We will explain what Developer B is doing that justifies his $80/hr rate, and what Dev A can do to to improve to that level (be it getting more training, taking more initiative, taking a more client-facing approach, improving team-work skills, etc). We are also transparent with our clients. We tell them how much each resource is being payed any how much overhead we anticipate. We aren’t in this business to make huge margins on one project. Our margins are actually quite close to cost when you factor in the overhead (training, R&D, management, software, etc). However, how we DO spend a significant amount of money on R&D and training compared to most firms, which ultimately produces significantly higher quality products.

Where can this approach go wrong? I am specifically looking for any case studies, laws, or even anecdotal reason to either tell me why the policies I would like to implement will or won't work very well, and to see what pitfalls of each approach are. I would like to start digging deeper into why the "don't share" policies exist and whether there is any logical backing for them.

Answer 1

I have worked in both types of systems. When I was a government employee, all salaries were a matter of public record. In private industry I have never worked anywhere that is was acceptable to discuss salary (in some places not even my direct boss knew what my salary was). (And yes I am aware that legally you are protected if you discuss it. In practice, that is not so true as a company can always find a reason to fire you and in many places in the US, they don't even need a reason. Discussing something the company doesn't want discussed is a career-limiting move.) And many people are reluctant to discuss their finances and do not want their salaries published. There is a strong culture of keeping financial information private in the US.

What I have found is that both systems have their flaws and create discontent. In the open system, there will always be people that other employees believe are being paid too much. In the open system it becomes difficult to get a large pay raise because then every other employee who thinks he is as good as or better than you (pretty much 100% of other employees) will try to justify a big raise too. If they don't get one, they will not be happy. To control costs, in open systems pay tends to be specified in bands around job classifications and if you are at the top of your bands, the only way to get a pay raise is to get a new job title. It is nice to think the raises will always be by merit but that is actually not true as the raises are decided on by people who are influenced by things other than merit even when they think they are not. There is no such thing as a meritocracy in any workplace, because no two people can agree on what is the best performance that should be rewarded.

However, when salaries are kept secret, is is much easier to discriminate against groups of people. It is also much easier to give your cousin that 50% pay raise when everyone else is being held to 2%.

Secret systems favor the good negotiators. Open systems tend to favor the people who are there the longest or those who are most adept at manipulating the bureaucracy. Neither one is fair over time.

Answer 2

The reason most companies try to keep your hourly and salary rates under wraps is that not all employees are worth the same amount despite the same title and responsibilities. Some employees are better negotiators, more ambitious, more proactive, more diligent, etc.

When you open up the salaries are public can of worms (which happened for many government position due to laws like Florida's Sunshine law making this knowledge public record) you can have two employees who work the same role, both think they do a better job than the other and should be paid more than the other. The problem is that they both think this; therefore, at least one of them is wrong.

While a decent operation could have metrics that establish pay rates etc., the moment you pay purely based on metrics you wind up where those metrics become the employee's one and only focus, other benefits they are offered become secondary and often neglected. (If I set pay based on average number of tickets processed by a tech, he's going to focus entirely on turning over tickets and not the maintenance he could be doing to prevent the ticket from ever happening.)

Now time for a fun thing most people don't realize. Here in the United States a Company cannot punish you for disclosing pay rates, benefits, etc. among other coworkers. (This is protected by the same laws that protect your right to unionize) Many companies simply don't realize this as it's one of those things judges/lawyers have interpreted, but to the average non-law student reading the laws you wouldn't likely come to that conclusion. Due to this there are countless companies with written policy stating you cannot disclose your pay rates with other employees. (this policy is unlawful, and if you were terminated for it would have a strong "wrongful termination" case) Now to be very clear, you're only protected discussing this internally, with your spouse, accountant, or other protected source (essentially people who would be expected to need this information) posting your salary on websites like glass door, or disclosing this information to friends outside the office is not protected.

Answer 3

Where can it go wrong?

Employees don't always have an objective overview of their role, how critical (or not) their position or set of skills are to the company, and so on.

In my experience (the experience is with keeping my salary secret, not with working in companies with an open policy) when people find out how much you earn (or when you find out how much they earn) they tend to compare it to their own salary, and look down on you, or themselves as a result.

If you can implement this policy in a way that doesn't cause resentment ("JohnDoe always leaves office one hour before me - why does he get paid more?"), more power to you.

With an open policy, I think it could work nicely, if there are other conditions that are satisfied first:

• company doing a real effort to increase employee satisfaction
• salaries being at least at market level
• having the roles clearly defined
• having competent/professional coleagues

Otherwise (if employees have real causes to be unhappy), having an open salary policy will cause other problems.

Answer 4

Typically open systems will force a more formalized salary structure over time. Consider the government and military pay systems. They are open, but because they are open they are subject to scrutiny and anything which is objectively unfair is steamrolled out until the playing field is level.

However, that rules out any subjective measurements of employment. If you are really good at forecasting sales then you can objectively measure your performance and compare it to another person whose forecasts are less accurate. If, however, you foster a working environment that enables others to work better and more happily, it's hard to justify in an objective way.

Worse, it usually starts to incorporate objective measures of employment that "make sense" but don't actually help the company. For instance, seniority. While the longer one works in a company, the more knowledge and skill they may have about the company and their position, there's no easy one to one correlation between the length of time one's been at a company and their value to the company. Someone may come in as a new employee and right off the bat be more valuable to the company than one that's been there for a decade. Further, there are some structural negative consequences of long term employment - "It's always been done that way, so we will always do it that way" and "If I only share the absolute minimum information I have to, then they will not fire me because I know things and have skills that they need that aren't easily transferred." Rewarding seniority with no other justification can change how people approach their position.

I joined a company which hired me due to experience gained on consulting projects completed during school, and paid me at a higher rate than others with less experience. When that company was purchased by a company with a structured salary that was essentially open, they could not count experience gained prior to graduation. While they didn't cut my salary, I knew I would not be given raises there for years until my in-company experience caught up with their pay scale.

You can probably come up with fixes for some of these problems, but generally these only work in small companies where everyone knows and trusts each other. Once you increase in size to the point where you don't know everyone in the company, then you might have a hard time understanding why someone two departments away is getting more than you unless it's clearly visible and objectively measurable.

Now, this doesn't mean that an open system is bad, but you have to understand the pressures and typical direction such systems move in. It can be hard to switch from open to closed, so you have to make sure it's what you want when you start using it.

Answer 5

I worked in a startup company since almost the start. Seven years with low salary, and little increase here and there, due to lots of financial problems. Mind you, I had the highest developer salary (according to my former boss).

Then they hired a guy with 10 years less experience than me. Can you guess how I felt when I found out they gave him the same salary as me?

Shortly after they tried to enforce a rule which prohibits us from discussing salaries.

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Salaries are negotiated during the interview, and it is possible for people who contribute the same to have quite different wages. Conversely, it is possible for people who contribute quite differently to have the same wage. Depending on the people, this can cause lots of grief and problems within the team if it is public knowledge.

Answer 6

Sumall is a .com startup that have always used open salaries. The excellent Planet Money did a podcast on When Salaries Aren't Secret discussing some of the pros and cons.

It seems much easier if your company starts with open salaries rather than trying to introduce them later. The podcast gives an example of a company that introduced them and the conflicts it created. Long-term though, the conflicts were resolved and company ended up with arguably fairer salaries.

• Pro: It is a fairer system
• Con: As a boss, you have to be prepared to have frank conversations with your employees about their value

(Edits: expanded 2nd paragraph, added points)

Answer 7

My understanding (which is not based on experience but from what I've heard from others) is that companies don't want employees to know if they are underpaid compared to others in the same company or at other companies. Besides being bad for morale, knowing that they are underpaid may cause them to be more aggressive in demanding raises. Whether or not the pay disparity is justified probably differs from one company to the next.

Answer 8

Transparent salaries means both the decision makers and the top earners will face more scrutiny. This creates an incentive to justify the salaries with more objective measures, which aren't necessarily better measures.

One of the easiest default objective measures that will end up having a more weight in a transparent salaried company is years working for the company. Salaries will also likely become less extreme, and more people will get closer to the average. Any parts of performance that aren't objective will simply get less weight in the equation because they are hard to justify so make everyone uncomfortable.

This means that exceptional and young employees working in fields where performance is mostly subjective will end up making less at a companies with transparent salaries, so they may just go elsewhere, but older worse employees will stick around. Even if the salary setters were stubborn and ignored their incentive to lean more towards easy to justify objective measures and paid everyone simply based on their best subjective measure of performance, it'll likely make the top performers uncomfortable making more than everyone else but not being able to objectively justify themselves either.

You see this effect in Sweden where all tax returns are public and people make much closer to the median salary.

Answer 9

Some short additional comments:

1) Buffer is an example of a company that publicly documents their salaries both internally and externally. They wrote about it on their blog. They also have a similar policy for equity.

2) I once worked at a very transparent company that decided against it. The co-founder's rationale for not sharing that information was (and I'm paraphrasing) "it was not only the company's information to share but rather also the employees' as well."

Answer 10

I think it's neither in the interest of the business nor the individual.

For the individual, I think it's largely a cultural thing in the US. Income is treated as a matter of pride and a measure of success so people with lower incomes might feel embarrassed or stressed. Meanwhile, people with higher incomes might be shamed or criticized for accepting that amount while a company is in tough times or while other employees make so much less. Where I grew up, it's one of those questions that is very rude to ask and not only do companies not usually share that information, but it's also rare for friends and family to share that information and considered rude to ask.

For the company, as you said, it puts a lot of burden on them to explain things. It's a major advantage and reality that a company can pay people different amounts for the same work. They might pay somebody more because that person was more effective in initial negotiations. They might pay somebody less because at the time of hiring the company didn't have enough money. They might pay somebody more because at the time of hiring there was an urgent shortage of staff. Maybe one employee threatens to leave and gets a raise in exchange for staying; if salaries were public that raise would now have to be given to all employees of the same profession who could repeat the same tactic? Additionally, in order to reveal their reasoning for paying an employee more or less they may have to reveal details that that employee doesn't want shared. In terms of finances, it seems it would likely almost exclusively result in people asking to be paid more. Therefore, it's likely to cause the company to have more expenses without an increase in productivity.

Also, it puts people's attention in the wrong spot. Not making the money visible is one way to prevent people from worrying too much about their pay and therefore to have them just focus more on doing a good job. Employees worrying about pay is optimization against the health of the company. Once all of that information is visible, people will start putting a lot more focus on how to make the most money or the most money for the least work...the two worst case scenarios for the business itself.

One of the biggest problems in large organizations is that it's hard to get anything done because too many eyes are required. The more information that is out there for everybody to see, the harder it is to get anything done and the more likely it is that things will have to be undone or changed. As you mention in your question, it's likely that this change would result in a lot of people coming in with questions, offers, complaints... each question/offer/complaint uses up the time and resources of the person complaining and the person listening and may require some investigation to see why something is the way it is or make corrective action. For example, lets say there is a complaint filer, Alice, and her boss or HR rep, Bob, who handles the complaint and they each make $50/hr. Alice spends 30 minutes filing the complaint (looking at salaries, seeing discrepancy, finding who to contact, formulating her case and sending it over). Bob spends 30 minutes investigating (reading the complaint, pulling up the records in question and finding out why the discrepancy exists, possibly investigating options for resolution). Then Alice and Bob meet for 30 minutes to argue a bit over it and negotiate a solution. That is 1 hour of each of their time, therefore that one complaint cost the company $200 of time regardless of what the outcome was. If there was a corrective action taken, you can then add both the actual cost (i.e. the amount of the raise they were given) and the cost of the time Bob spends contacting people and shuffling things around to make that change. For a large corporation, this overhead could be huge and is a distraction from actual work. Making the salaries hidden makes it likely that only people who are truly upset with their salary would do this, making it public makes it so that a lot more people would see discrepancies that they don't know the reason for, think this entitles them to that rate and complain.

Answer 11

From my experience so far in the companies I've worked at, salaries/hourly rates are not public knowledge per se but they are certainly not hidden. If you open up any proposal there is a cost structure in there with people's billing rates. The same information exists on invoices which are not in some closed system; they are queryable. Maybe my side of the world (consulting) is different from a a software company which is offering a product as opposed to a "brains by the hour" kind of deal.

I usually don't go snooping through these things, though I could, because I just don't care.