Pay Transparency in Heterogeneous Teams: Could Some Fairness Concerns Hurt Productivity?

Abstract

In homogeneous teams, pay transparency, which induces agents to compare themselves to others, leads to a higher output (and thus, a higher payoff for the principal managing them), results in no inequalities in equilibrium (i.e., agents find the outcome fair), and is inclusive (i.e., all agents are engaged in production). This is true irrespective of the basis of social comparisons: income, utility, or reward. How about heterogeneous teams? Could pay transparency backfire under some types of fairness concerns? Methodology/Results: We consider a model of a principal and two agents of different abilities who are averse to inequalities between each other under pay transparency. We study three bases of comparison: income, utility, and reward. For each type of fairness concern, we characterize when pay transparency leads to a higher or lower payoff for the principal, results or not in inequalities between agents, and involves only one or both agents in production. We find that income fairness never benefits the principal and might be perceived as unfair and non-inclusive, in contrast to reward fairness, which is always beneficial on all three fronts. Utility fairness lies somewhere in between, offering benefits on all three fronts when agents are not so heterogeneous, but hurting fairness and inclusivity without changing the principal's payoff otherwise. Managerial Implications: Although pay transparency can help close the gender pay gap, anchoring agents to income fairness by disclosing only their incomes can hurt their productivity while creating feelings of unfairness and lack of inclusivity. In contrast, anchoring them to reward or utility fairness by contextualizing their incomes with their individual contributions or costs may be beneficial on all three fronts.

Keywords: Fairness, Principal-Agent, Teams, Moral Hazard, Inequality Aversion, Heterogeneity, Pay Transparency fairness, principal-agent, teams, moral hazard, inequality aversion, heterogeneity, pay transparency