Does your company provide details on how much everyone in the organization makes, from the CEO down to the lowest-paid employee? At many organizations, talking about pay is taboo. But this trend is changing as businesses big and small move toward open salary policies.

An open salary policy is exactly what it sounds like: Everyone's salary is publicized for all to see. Salaries may be kept on a spreadsheet or in an otherwise accessible format, and employees within the organization (and sometimes people outside of it) can see exactly what their co-workers make.

While this may seem odd to those whose companies follow the traditional model of keeping salaries secret, there are some definite benefits to being open about everyone's income. There are also some downsides to consider, though. 

Employee receiving a paycheck

Image source: Getty Images.

Benefits of an open salary policy

Open salary policies have been shown to have big benefits for workers and employees. Advantages include:

  • Decreasing pay disparities: Pay transparency is believed to be one possible way to reduce wage gaps and ensure all workers receive equal pay for similar work. Businesses can better attract top talent and reduce the risk of being sued for discrimination, while workers benefit from knowing their gender or race isn't hurting their earnings. 
  • Increasing employee motivation: A study of 280 Israeli undergrads showed that when students received bonuses for completing certain tasks, performance suffered when they were prohibited from discussing the compensation that other study participants earned. Students completed tasks individually, but were compensated based on performance relative to others in an assigned group. When told their pay related to the performance of others but they were barred from learning how much group members were earning, performance suffered further. The most productive participants faced the biggest performance decline due to pay secrecy, suggesting that transparency around compensation motivated the students to do better work.
  • Improving productivity: A 2013 study completed at the University of California-Berkeley showed that providing workers with information on how their income compares to others resulted in a productivity boost of as much as 10% of average output. Study participants were paid per completed data-entry task during a fixed work period. Some were told only of their own earnings after completing one work period and before beginning another. A different group was provided with information on how their earnings compared with others. There was no direct reward for improved performance during the second work period, but study participants with comparative pay data worked harder and performed better. 
  • Decreasing turnover: A survey of 71,000 companies by PayScale -- a website providing salary and benefits information -- found that employees were more likely to think their salary was fair (and less likely to leave an organization) if their company communicated clearly about salary. Pay transparency was found to be more important in influencing employee engagement and reducing employees' intent to leave than were typical employee-engagement metrics such as opportunities for advancement. 

Buffer, a social media scheduling company, is known for its transparent pay policy and makes salary data available not only to employees but to the public, and Whole Foods has had an open salary policy since 1986, showing that these policies do work for some big organizations. 

Downsides of an open salary policy

Companies contemplating an open salary policy also need to consider possible downsides, including:

  • Lower-paid workers could have reduced job satisfaction: While some research has shown an increase in job satisfaction and decrease in turnover due to pay transparency, other data suggest lower-paid workers experience lower morale, while there's no impact on those earning a median salary or higher. This same research, conducted in 2011, showed that workers with incomes below the median are more likely to look for a new position, while retention is neither increased nor decreased for those with earnings above the median. 
  • Salary comparisons could encourage dishonesty: One study published in the journal Organizational Behavior and Human Decision Processes found that lower-paid study participants were more likely to cheat on tasks if they were able to compare their earnings to higher-paid participants. The study concluded that upward social comparisons encouraged cheating among lower-compensated participants. However, the study author stressed that this effect occurs only if those on the low end of the pay scale believe they have no other recourse and that the pay disparity is unfair. Transparency about why salary differences exist is essential to reduce the likelihood an open salary policy will increase unethical behavior. 
  • A lack of privacy: Some employees may feel uncomfortable having their salary broadcast to their co-workers, or even to the world if the company makes pay information publicly available. Competitors could also use published pay data to try to lure talent away, and companies open themselves up to criticism. 

Of course, the awkwardness factor and potential for resentment also cannot be understated. This is especially true in circumstances when brand-new employees may be paid higher than veterans at an organization. 

Should your company implement an open salary policy?

Companies considering an open salary policy should take care to introduce it in a proactive and positive way, especially if it's being implemented in an established business. And, because data is mixed on whether sharing salary data has long-term advantages or disadvantages, it's imperative to think carefully about whether this approach will work given your company culture. 

Even among companies that don't have open salary policies, it's becoming easier than ever for workers to use online tools to compare their own income to others in their professions. So businesses still need to ensure they're providing fair pay while employees have plenty of opportunities to determine their worth and negotiate effectively for a reasonable salary.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.