It’s OK if the Boss Earns More, but a Problem When Co-Workers Do

Study of a large corporation explores how salary comparisons affect employee behavior

The argument for pay transparency goes like this: Reveal how much everyone in a company makes, and it will be easier to correct pay inequalities — or to prevent them in the first place.

But what if salary transparency affects how employees do their jobs? And not always for the better? That’s the premise of a working paper by Zoe Cullen of Harvard and UCLA Anderson’s Ricardo Perez-Truglia, who documented what happened when employees of a large corporation were given information about the salaries of their peers and managers.

The major takeaway: People resent the co-worker who’s paid somewhat more (11.7 percent on average) than they are, but seem less inclined to resent the boss who’s paid a lot more (315 percent on average). After employees in the study learned about higher peer salaries, they worked less, were less productive, reported decreased job satisfaction and were more likely to leave the company. When higher salaries belonged to managers, however, employees stepped up their game and reported greater enthusiasm, presumably because of pay aspirations: that is, employees were motivated by the possibility that they, too, eventually could earn more.

The corporation in the study, a private commercial bank based in Asia, is representative of many multinational firms with billions in assets, millions of customers and thousands of employees across hundreds of locations. Its salary discrepancies between workers and managers are comparable to same-size U.S. firms. And, like more than 60 percent of companies in the United States, this Asian bank does not disclose salaries to its employees. Also like many U.S. employers, the bank discourages employees from discussing salaries with each other.

Cullen and Perez-Truglia sent emails to a sampling of workers, inviting them to take an online survey (voluntary but with small cash rewards for completion). Of the 3,841 emails sent, 2,060 finished the survey. Respondents ranged from tellers up to unit directors, with an average tenure of five years and an average age of 29. Nearly three-quarters of them were women.

The survey began with questions about perceived salaries, then moved on to providing information about actual salaries. Interestingly, the authors show that many employees misperceive others’ salaries simply because they lack information, not because they aren’t interested. In fact, employees in the study actually were willing to pay for that information, anywhere from less than an hour’s wage up to a full two weeks’ salary.

The authors paired the survey results with real-time data that included clock-in and clock-out times, number of work emails sent and received, sales performance, and job changes and departures.

Cullen and Perez-Truglia’s findings — that vertical pay differences are less off-putting than horizontal pay differences — could explain why firms add incentives along with promotions instead of with lateral moves.