Two Opposing Views on Pay Transparency
Posted on Wednesday, February 25, 2009 by Frank RocheI’ve been doing a lot of reading about pay transparency in the past few weeks. I get Google alerts. I watch for Twitter hashtags about it. I read blog articles. (I’ll be getting to those later this week.) There’s a lot of information out there. I have a personal view about what will happen if we end up with a demand to expose everyone’s pay to everyone else that I’ll get to a bit later.
For Pay Transparency
Meanwhile, here are two opposing views about pay transparency. The first one comes from KnowHR commenter, Elandra, who is for shining a bright light in dark corners:
I am fascinated by these comments. I participated in the survey and vigorously defend my position that pay transparency should be adopted in all organizations. The justifications for not blowing open the salary books point to a workplace that is tinged with fear of accountability, perhaps incorrect practices that have been historically adopted and never challenged, and an environment where pay is not an indicator of performance.
What are we all so scared of?
If a person is being overpaid or underpaid, why can’t this be addressed in an open way? We’re already seeing the scoffing of huge executive payouts/bailouts, why should it be any different no matter what level you’re at in an organization?
Against Pay Transparency
On the other hand, incentive expert Paul Hebert writes in Fistful of Talent about the downside of pay transparency in an article about capping CEO pay:
Talk about unintended consequences. One of the reasons cited for the huge salaries and pay packages available to top executives is in fact greater transparency caused by the disclosure requirements in Sarbanes-Oxley. Congress enacted the Sarbanes-Oxley Act of 2002 in response to a spate of highly publicized business failures and corporate improprieties. The issue they said was a lack of oversight and transparency. I don’t want another Enron and can see why more transparency was needed but, some of the requirements of SOX may be what is driving CEO pay issues. Specifically, once I can see what others get paid – that’s what I want. The highest salary now becomes the minimum salary and I want more than the minimum.
wile
Feb 25th, 2009
Not sure is an issue the fact that a CEO knows the pay of others_
a) ’cause they know anyhow – headhunters are more than willing to inform them;
b) ’cause a CEO should know his/her value
No positive effect in being not transparent – it’s just a way that we (HR) use to mask our lack of ability to hire and grow mature resources.
Charlie
Feb 26th, 2009
“…The highest salary now becomes the minimum salary and I want more than the minimum.”
I imagine people may feel this way. But I don’t see it as a problem, but rather a good thing. Managers just need to respond “Prove that you are worth it.” Transparency then just becomes a motivational tool.
Darcy
Feb 26th, 2009
Business Week published a study on August 20, 2007 asking people if they were in the top 10% of performers in their company. The overall average of people answering “yes” to that question was 90%.
I am not totally opposed to pay transperency, but I do think the organization would have to be prepared to address this issue. If 90% of people think they’re in the top 10%, that’s where they’re going to think their pay should be too.
Although your top 10% performers are the ones you absolutely cannot afford to lose, you also need the other huge percentage of people who are meeting your expectations for their particular position, your “valued contributors”. Pay transperency may cause conversations about how someone’s performance isn’t as stellar as they themselves believe it to be, which could then result in lowered morale, productivity, and even costly turnover.
Frank Roche
Feb 26th, 2009
@Darcy, wow, what a crazy stat, huh? Everyone thinks there’s a superstar. That is going to be the essence of what companies will have to do if pay transparency becomes the law of the land — then it’s going to require the tough discussions about performance — and many, many people are going to be astonished that they’re not at the head of the class.
Frank Roche
Feb 26th, 2009
@Charlie The performance assessment is going to be the big thing. We’ll go from undiscussable to open discussion. I’m not sure how it would work out, but I’m intrigued.
Frank Roche
Feb 26th, 2009
@Wile Hmmm…I have to think about that. My take is that opening up the books without a lot of preparation is going to release the floodgates, and no one will be prepared for that.
PeachFlambe
Mar 1st, 2009
Not to be overly nit-picky or technical, but the requirements for enhanced disclosure of executive pay were not a part of Sarbanes Oxley (other than the prohibition of loans to executives). The most recent revisions to the disclosure regulations covering executive comp were enacted by the SEC in 2006, four years after SOX (and 14 years after the last major rewrite). While the same forces certainly contributed to the desire for increased disclosure, the accounting and financial disclosure changes required by SOX preceeded the exec comp changes by a few years.
On the topic of transparency – I say be careful what you wish for. This really isn’t an issue about pay, it’s an issue about people’s perception of their self worth. In my 24 years in big corporations, I have found that most pay systems sit on top of completely inadequate performance management and career development processes that are run by managers who are not skilled in people management. It’s easier to let people believe they are better than they are, since to give them true, honest feedback would be disruptive to the business, make the manager’s job harder, etc. So performance issues don’t get addressed, people continue to get raises (because to deny them would be “demotivating”) and along we go until a major shock – a recession, say – means we have to deal with the years and years of poor management. And how do we do that? Layoffs.
Performance is in the eye of the beholder. There are very few jobs where there is an absolute standard. And people will always think they are better than their boss thinks they are. I don’t think anything we can say about pay is going to change that.
Frank Roche
Mar 2nd, 2009
Really great…I will use this as a story in its own right tomorrow…really well said..it’s going to be about performance management…so true.