How pay transparency can be detrimental to organizational performance

Advocates of greater pay transparency argue it is a necessary step for eliminating pay discrimination, and being open about pay will produce additional benefits like enhanced employees' morale and performance. However, pay transparency can end up causing more damage than good, according to the Harvard Business Review.

Broadcasting pay is just as likely to demoralize workers as it is to motivate them, according to the report. One study cited by the Harvard Business Review illuminates why.

After asking 700 engineers from two large Silicon Valley companies to assess their personal performance in relation to their peers, nearly 40 percent indicate they felt they were in the top 5 percent and 92 percent said they believe their performance ranked in the top quarter. Only one person gave his or her performance a below-average score. The study shows that individuals' tendency to inflate their self-worth makes the task of linking pay to performance very difficult.

As a result, publicizing pay convinces employees — nearly all of whom hold inflated self-perceptions of their performance — that their current salary is far below where it should be. Although transparency is intended to boost openness and trust, it can backfire, instead spurring dissatisfaction with the employer, demoralization and greater attrition.

To read the full Harvard Business Review report, click here.

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