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How muchEUinseadYour browser does not support the element. do your colleagues get paid? In a few countries, such as Norway, you can take a good guess by looking at public records on individuals’ overall tax payments and income. But in most places, finding out people’s salaries means asking them what they earn. And that is about as socially acceptable as saying “What an ugly baby.”In a recent study Zoë Cullen of Harvard Business School and Ricardo Perez-Truglia of the University of California, Los Angeles, offered monetary rewards to employees of a South-East Asian bank if they were able to accurately estimate the wages of some of their peers. The researchers found that a majority of employees were very uncomfortable asking colleagues about their pay and were also unwilling to reveal their own salaries to their colleagues, particularly if they thought they might be earning more than them.Norms of privacy and secrecy around income help explain why legislators who fret about unfair pay differentials increasingly require greater transparency. Few jurisdictions are as radical as the Scandinavians, but more and more of them are mandating that firms disclose gender (and other) wage gaps, publish pay ranges on job adverts or refrain from asking about applicants’ prior earnings. New transparency laws take effect in Illinois, Minnesota and Vermont this year; an directive is due to come into force in 2026.A recent review by Ms Cullen into the effects of all this sunlight reveals a mixed picture. Greater transparency about what people in similar jobs are earning has helped close pay gaps between men and women. This is not because lower-paid employees were given big pay bumps, however, but because average wages were suppressed. Transparency appears to hand employers a powerful bargaining tool: firms can argue that a pay rise for one individual would need to be replicated for others.A Danish law from 2006, requiring that firms above a certain size disclose gender pay gaps among comparable workers, provides an example. In a paper published in 2019 Morten Bennedsen of and his co-authors found that the gap between men and women narrowed, primarily because male employees saw slower wage growth. A lower wage bill is not necessarily good news for firms, however. Productivity at affected Danish firms also went down, perhaps because lower earners were fed up to discover they were undervalued or because higher earners resented the slower wage growth that followed.Disclosure can lead to different outcomes. Requirements to include salary details on job postings appear to push up pay, for example, in part because firms as well as employees have better information about market rates. It is surely worth paying a bit more to avoid wasting time on job applicants whose salary expectations bear no resemblance to budgets.Transparency can also stoke motivation. A recent paper by Cédric Gutierrez of Bocconi University and his co-authors found that pay transparency among American academics increased the effort of those who were revealed to be overpaid. If you’re earning a lot more than others, you’d better prove your worth.As for wage disparities between bosses and those below them, you might imagine that gaps foster resentment. But they can also pique aspiration. Other research by Ms Cullen and Mr Perez-Truglia suggests that employees not only consistently underestimate how much managers earn but also work harder when they find out the rewards that promotion can bring.Transparency makes it more important to get performance-based pay right. A recent paper by James Flynn of Miami University looked at what happened when the previously secret salaries of ice-hockey players in North America were published in the middle of the 1990 season. Underpaid players shifted their efforts towards scoring goals and providing assists, which were more highly rewarded than defensive contributions, to the detriment of their teams’ performances as a whole.Pay transparency offers prizes and pitfalls for managers, in other words. If things go well, it ought to close unjust pay gaps and provide workers with more information on their options inside and outside their firms. If things go badly, morale and productivity may suffer as the pursuit of equity catalyses slower wage growth; performance-based pay may converge on things that are easier to measure, not what matters most. Sunlight is lovely. It can still cause damage.
