Pros and cons of salary transparency

A couple of years ago, I got an email from my boss. He said he was planning to take salary transparency a step further: he wanted to release a spreadsheet to the public, listing the exact salaries of every employee.

That boss was Joel Gascoigne, CEO of Buffer. He went ahead with the public spreadsheet after existing team members discussed and agreed on the idea.

Buffer still leads the charge in transparency – not just with salary information, though that’s one area they’re particularly open about. It’s rare to find a company willing to share salary information among employees, and finding a private company that makes salary information public is almost impossible.

The Buffer salary spreadsheet is alive and well today. It has many more employees on it now, and while the formula to create salaries has evolved, the company remains steadfast in its commitment to transparency.

Salary transparency made Buffer a more productive company

Buffer’s founders wanted to avoid the common office politics that grew around salaries by making everyone’s pay common knowledge. This is a radical move when most of us are used to people's salaries being a secret. A 2010 survey found about 23% of private-sector workers said pay discussions at work were banned outright. Another 38% said discussing their salary with colleagues was discouraged.

Buffer may have also inadvertently increased productivity by creating a more engaged team. Research from Tel Aviv University found employee performance decreased when salaries were kept secret. The study paid 280 undergraduate students to complete a computer matching game and handed out bonus pay depending on how well they performed. Half the participants were only told about their performance and bonus pay, while the other half were given the same information for themselves and the three others in their workgroup.

Some of the students were paid bonuses only based on their own performance, while others were paid depending on how well their workgroup performed as a whole. The study found those who didn’t have access to pay information about others in their group performed worse. And those who didn’t have transparent pay information and were paid based on how well their entire group performed did even worse.

Another study found that in two rounds of work, participants worked harder in the second round if they were exposed to information about how everyone else was being paid. High performers from the first round were the most likely to work harder in the second round to increase their earnings. These studies indicate that salary transparency can improve performance by showing that pay is fair among colleagues and directly related to performance.

SumAll pays more fairly due to transparency

Dane Atkinson, CEO of analytics software company SumAll, admits he’d previously used the standard salary secrecy model to his advantage. Atkinson is a serial entrepreneur who started his first company when he was 17. He’d had enough experience with the downsides of salary secrecy by the time he started SumAll. At that time, he knew he wanted to do something different.

Salary secrecy is abusive, according to Atkinson. “Many times, I paid two people with the same qualifications entirely different salaries, simply because I negotiated better with one person than the other,” he says.

Atkinson says the pressure of working with investors encouraged this type of practice. “If you can get talent at a discount,” he says, “your board will cheer. That’s why it’s an abusive system.”

For SumAll, Atkinson created salary transparency from the beginning. In the past, he would sometimes pay far more than an employee was worth, simply to get some work done on a tight deadline. These days, that kind of action wouldn’t be taken well since the inequality is open for everyone to see.

The trade-off is worth it, though, according to Atkinson. He believes “salary transparency is the single best protection against gender bias, racial bias or orientation bias.”

It also gives employees a way to discuss their own compensation if it doesn’t seem fair compared to others. Under the secrecy model, you have no recourse for unfair pay, says Atkinson. “You could find out exactly what someone else makes and be distraught by it, but you can’t address the issue because you’re not supposed to know.”

SumAll’s transparency allows employees to discuss their pay openly. In the past, this led to a raise when an employee on an interview panel realized the new hire would be paid more than them despite having less experience. Without that transparency, the discrepancy would have gone unknown or at least unresolved.

Downsides of salary transparency

While the benefits of salary transparency are easy to grasp, there can be downsides when it's not communicated well. Opening up salary information suddenly in an established company can cause problems if salaries aren’t equally distributed or if employees simply aren’t ready to have that information shared. Scott Rick, assistant professor of marketing at the University of Michigan, says we should “think very carefully before revealing this stuff. It’s so personal; people see it as their worth.”

In one of Rick’s studies, he found that when participants were given a task counting dots, they performed worse when they knew they were being paid less than others. In other research, Rick has shown people are more likely to cheat when grading their own trivia quizzes if they know they’re being paid less than others. The participants earned money for each correct answer to the quiz. “For people on the low end of a pay discrepancy, if there’s no other recourse, our study suggests that [people] may very well cheat to even the score,” says Rick.

Transparency without a clear salary policy can be troublesome

Tim Low, vice president of PayScale, which provides compensation data to more than 2,500 companies, says salary is an emotional topic for most people, which can cause chaos if it’s suddenly thrown into the light without clear policies.

Low says the difficulty with salary transparency comes from having “different job families within a company.” In these cases, it’s harder for employees to understand the nuances of each role’s requirements and the experience and qualifications of their colleagues that have led to final salary decisions. Low says it’s more important for management to be transparent about how they reached compensation decisions than the actual numbers.

Carol Boyer, assistant vice president of compensation at North Shore-LIJ Health System in Manhasset, N.Y., agrees. Boyer says employee engagement comes more from informing team members how their salary is determined than simply telling them what everyone else is earning. “If I trust there’s a process and the process is fair, that drives engagement more than ‘show me the salary,’” she says.

Buffer focused on both of these aspects: not only did the company release salaries for all employees but the strict formula used to generate salary offers is also public. (They’ve even made a calculator you can use to check what your salary would be if you worked at Buffer.)

At Buffer, everyone gets the same benefits. At other companies, leaders may use benefits to pad out salaries. In those situations, salary transparency can give a skewed picture of how employees are truly compensated. Explaining the decision behind compensation decisions can be as powerful as opening up a list of team pay packets.

Salary transparency isn't a solution to wage disparity

Continuing with their commitment to transparency, Buffer recently spoke publicly about an internal review of wage inequality in the company. Whereas earlier on, the founders assumed transparent salaries would necessarily discourage bias, they’ve now realized salary transparency alone isn’t enough to ensure wage equality.

Co-founder Leo Widrich told Fast Company he was relieved that salary transparency meant there were no negotiations to deal with, which could have disadvantaged more reticent employees, who are often women. In analyzing the data, however, the company found a wage gap of around $10,000 between men and women. Excluding founders, male Buffer employees make an average of $98,705, while women make $89,205 on average.

The “experience” aspect of Buffer’s salary formula is the most subjective. The possible categories include beginner, intermediate, advanced, and master – but the hiring manager determines the category after talking to the new hire. Buffer admits this may be leaving some unseen bias in setting salaries for new employees and contributing to the wage gap.

Looking at the team’s current employees, the salary analysis found that 58.3% of female team members were set at the intermediate level, while 61.4% of male employees were set at the advanced experience level. They also found more men work in development, which is a higher-paid area of the company, and more men have been at the company longer, which earns them a bigger loyalty bonus.

New hires spend 45 days trying out their role at Buffer to ensure they’re a good fit for the team. During this period, team members often start at a lower experience level with the idea that they’ll re-negotiate this aspect of their salary once they officially join the team. Buffer’s PR crafter, Hailley Griffis, says this process “feels like it could easily create a system where those who are bold enough to revisit the topic might gain from that conversation, whereas those who are more reticent to raise the issue could receive less as a result.”

Going forward, Buffer is focusing on making the “experience” part of the salary formula more explicit to avoid any unconscious bias and promoting more women within the company into more experienced roles.

It’s been a few years since my salary was published on the internet. These days, I have more negotiating power because I’m the only one who knows what I’m being paid and what I’ve been paid before. But I’ve never found the same level of confidence I had in Buffer’s salary formula. Knowing how and why my salary was determined was even more powerful than knowing what my colleagues made. There was never any question about whether my pay was fair.

Ultimately, this is what salary transparency is aiming for: fair pay and employee trust in that fairness.

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