Management Accounting Section Midyear Meeting

What Are You Hiding? The Strategic Use of Pay Secrecy and its Effects on Managerial Honesty

• In Event: Control Systems (Experimental) II

Abstract

Pay communication, or the organizational practices regarding if, what, how, when, and to whom pay information is given, is a popular topic among legislators, business press, and employees, but underappreciated by academics as a component of a firm’s compensation and control systems. Using two experiments, I test the implications of using pay communication policies strategically. In Experiment 1, I predict and find that participants acting as principals use pay secrecy policies as a control mechanism in an attempt to mitigate the increase in managerial misreporting associated with inequitable pay. In Experiment 2, I examine agents’ reaction to the principals’ choice of pay communication policy. I predict and find that agents interpret the principal’s decision to enact a pay secrecy policy as a signal of the principal’s private information regarding pay equity. I find that lower-paid agents misreport similarly under pay secrecy and pay transparency policies, and equally paid agents under pay secrecy policies misreport similarly to lower-paid agents. Additionally, I predict and find an incremental increase in misreporting from attempting and failing to conceal pay inequity in a setting where the principal selects a pay secrecy policy and the salary information is subsequently leaked. I find that agents’ trust in the principal mediates this effect.

Author

• Conor Brown, University of Pittsburgh