8 areas to assess if you’re considering pay transparency

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Peter DeMarco answers leadership questions from readers. This article was originally published at the New York Business Journal.

Question: Should salaries be transparent to all employees?

I watched an episode of Point Taken on PBS in which the audience answered “yes” at an more than two-to-one margin. My business partner and I have had this debate over whether we should make compensation transparent in our company.

I have found dozens of articles exploring the pros and cons, but none that have helped me figure out if it’s right for our business. What do you think?

A: Carlos Watson did a nice job facilitating the debate you mention. Watching is certainly worthwhile for readers interested in the issue: http://www.pbs.org/video/2365739262/.

Under the right conditions pay transparency can help bring clarity to the role of each person in the business, bolster the need for more performance discussions, give employees and potential employees a clearer picture of the path to more compensation, increase trust, and shed light on pay disparities related to race, color, gender, creed and friend or family work relations.

In my view, pay transparency has the potential to improve organizational justice (all people are paid fairly for the work done) while exposing and even punishing vices (greed or envy) that harm a healthy company culture.

That said, pay transparency is not a cure-all. There is simply no substitute for leaders who practice fairness within their organization.

If you’re considering greater pay transparency for your organization, here are eight areas to assess:

1. Job roles and responsibilities

It is hard to place a value on a poorly-defined job. Many companies struggle with good job design (i.e., how the job fits into the organization). Some employees end up doing the work no one else wants to do.

Such “utility” or “clean-up” roles tend to be under-valued until that employee is gone (e.g., troubleshooting issues, expediting an overly-complicated quoting process, dealing with irate customers the customer service group can’t handle and so on). Pay transparency would help your business if it casts light on poorly-defined jobs that are covering up for real process problems.

2. Compensation model

Compensation is an assignment of value to the contribution each individual makes to the good of the whole organization.

Does your company encourage individual performance over team performance? Is the criteria for pay increases, bonuses and other compensation reasonably objective (sound performance measures) or too subjective (at the sole discretion of management)?

Pay transparency would help your business clarify the need for sound measures of performance.

3. Loyalty

Sometimes, small business leaders pay employees too much. The owner feels indebted for contributions these employees made early in the business. While there is certainly a real value to having loyal employees, the compensation paid for past deeds ought not to generate a free pass on the performance needed today. Pay transparency would help your business to expose these distortions.

4. Shareholders/owners

Are the interests of the employees aligned to the interests of owners or shareholders (see agency theory)? Pay transparency would help publicly-traded companies if it helps expose over-paid, greedy executives who have taken pay at the expense of shareholder value.

Privately held companies have far less obligation to transparency, and would benefit if some employees are taking advantage of or manipulating the goodwill of their owners/leaders.

5. Respecting privacy

Even if your compensation model is in alignment, is it consistently followed? Sharing the compensation of others may have the effect of penalizing loyal employees or good negotiators. Employees who negotiated salaries in good faith and with the expectation of privacy have a reasonable expectation to maintain that privacy.

6. Risk tolerance of employees and owners

Anxiety can suffocate performance. Some people cope poorly if there is uncertainty surrounding their pay, preferring a higher base salary and low or no bonus payout. Other employees (like sales) have a greater appetite for risk, and are comfortable with a lower base salary and higher commissions or bonus payouts for good performance.

Pay transparency would hurt your business if you cannot explain why employees who are willing to bear risk are paid more.

7. Competitive environment

Pay transparency can affect the competitive position of a business in attracting and retaining talent. For example, pay transparency is a competitive advantage for The Container Store because it offers compensation at twice the market rate not easily matched by other store chains. But pay transparency would hurt your business if you have an uncompetitive cost structure compared to the market or a bidding war for talent would ensue.

8. Company culture

Have past pay practices led to an entitlement culture (“I showed up, so I deserve to be compensated just like everybody else”) or one rooted in justice (“I deserve to be compensated based on the value I contribute”)? Pay transparency is unlikely to cure a lack of accountability in your company’s culture.

In the old whaling ship model, pay was not guaranteed. Every crew member from the cabin boy to the captain were paid a share in the success or failure of the voyage.

As described in Herman Melville’s book, Moby Dick, the whaling ship model pays the crew a cut of the profits according to the contribution of each. Unfortunately, pay transparency does not ensure fair negotiations or that the risks involved are sufficiently understood.

Melville’s character, Ishmael, agreed to take only 1/300 of the ship’s revenue simply because he wanted to be free of merchant ships and part of a whaling ship. But Ishmael was initially unaware that his ship captain, Ahab, harbored a deep rage for having lost his leg as the result of an earlier encounter with the whale, Moby Dick.

Ahab’s obsession for revenge led to catastrophe for the whole crew. Only Ishmael survived the harrowing voyage.

Pay transparency done poorly is a social experiment that distracts from making money or, worse, a disaster that agitates your crew to the point of mutiny. Done right, pay transparency should enhance fairness and performance. Start small and see if the benefits outweigh the risks.