Management Accounting Section Midyear Meeting

Does Pay Transparency Help or Hurt? Evidence on Employee Motivation

• In Event: Transparency

Abstract

The prevalence of pay transparency has grown in recent years, yet there is limited empirical evidence regarding its potential motivational benefits and costs relative to pay secrecy. Using an experiment, our study investigates the effect of pay transparency on employee motivation while considering two important aspects of the context in which relative pay information is typically provided. 1) Pay transparency is embedded in a broader information environment that often includes relative performance information (RPI) via formal performance feedback systems or through informal sources. 2) Pay transparency reveals pay dispersion which can have different causes: performance-based and non-performance-based. Drawing on theory of social comparison and distributive fairness, we predict and find that ultimately, the effect of pay transparency on employee motivation depends on the information that pay transparency reveals. Specifically, although anecdotal evidence and initial research suggest a positive motivational benefit of transparency, we find pay transparency has no motivational effect when it reveals to employees that they are fairly paid or overpaid. However, pay transparency has a negative motivational effect when it reveals to employees that they are underpaid. By highlighting organizational and environmental factors that influence the effectiveness of pay transparency, our study provides insights on the potential benefits and costs of pay transparency, and thus adds value to the on-going debate regarding pay transparency versus pay secrecy.

Authors

• Robert A. Grasser, University of South Carolina

• Andrew H. Newman, University of South Carolina

• Grazia Xiong, University of South Carolina