Does Pay Transparency Help or Hurt? Evidence on Employee Motivation

Abstract

Despite an increase in pay transparency within firms, there is limited empirical evidence of its motivational effect on employees. Using an experiment, we investigate the effect of pay transparency on employee motivation in the context of a broader information environment in which relative performance information allows employees to assess the distributive fairness of any pay dispersion that pay transparency reveals, and pay dispersion can occur for performance-based and non-performance-based reasons. Drawing on theory of social comparison and distributive fairness, we predict and find that the effect of pay transparency on employee motivation depends on what it reveals. Specifically, pay transparency has no clear positive motivational effect when it reveals that employees are fairly paid or overpaid, and hurts motivation when it reveals that they are underpaid. Our study highlights the importance of firms’ existing pay structures and performance feedback environments when weighing motivational benefits and costs of pay transparency.

Keywords: Pay transparency, pay dispersion, pay fairness, employee motivation