The Motivating (and Demotivating) Effects of Learning Others’ Salaries

Pay inequality is common in most workplaces. You get paid significantly more than your subordinates, your boss gets paid more than you, and your boss’s boss gets even more. In many large organizations, some employees can take home paychecks tens or hundreds of times more than others.

Whether you like it or not, your employees have wondered at some point about your salary — and their peers’. Should you be worried about that? Our recent research sheds light on this question, and our findings may surprise you.

We conducted an experiment with a sample of 2,060 employees from all rungs of a large commercial bank in Asia. The firm is quite representative of most companies around the world across some key dimensions, including its degree of pay inequality and non-disclosure policy around salary.

The first thing we looked at was manager salary. Through an online survey, employees had to guess the salaries of their managers. To make sure they had incentives to be truthful, we offered rewards for accurate guesses. The vast majority of respondents missed the mark by a significant margin (on average, employees tend to underestimate their manager’s salary by 14%). And this is where the action happens: by the flip of a virtual coin, we decided whether to “correct” a respondent’s estimate, by providing accurate information from the firm’s official salary records. So half of the respondents learned how much their boss truly earned — a salary higher than what they initially thought — while the other half did not.

Think about it this way: Let’s say there are two employees (similar in terms of level and experience) who think that their bosses get paid three times as much as them; but in reality, their boss gets paid five times as much. The flip of our coin randomizes which employee will learn that her boss actually gets paid five times more than she does, and which employee will not be corrected. Then we can compare the subsequent behavior of these two similar employees, to see how learning that your boss makes much more than you might affect your productivity.

To measure the behavior of these two groups of employees, we gathered daily timestamp, email, and sales data for the year following our survey. To our surprise, finding out that their managers got paid more seemed to make employees work harder than those who did not find out the true salary. Our estimates suggest that discovering that the boss’s salary is 10% higher than originally thought causes employees to spend 1.5% more hours in the office, send 1.3% more emails, and sell 1.1% more. (The higher the surprise, the larger the effect — finding out the boss earned 50% more led to effects five times larger.)

The evidence suggests that these effects were driven by aspirations. The effect of knowing manager salary was more substantial for employees who learned about the pay of managers who were only a few promotions away, whose shoes they could realistically aspire to fill. We find that, when the boss is fewer than five promotions away, for each 10% increase in the perceived salary of the boss, employees spend 4.3% more hours in the office, send 1.85% more emails, and sell 4.4% more. We also found that, after realizing that these managers get paid more, employees became more optimistic about the salaries they will earn themselves five years in the future. On the other hand, we found no effects on effort, output, or salary expectations when the employees learned about managers several promotions away (e.g., an analyst learning about C-suite salaries).

There is a caveat, though. While employees seemed perfectly capable of handling this vertical inequality, they did not handle horizontal inequality nearly as well.

In our experiment, we also asked employees to guess the average salary among their peers — that is, the other employees with the same position and title, from the same unit. Even though employees did better at guessing the salaries of their peers than that of their managers, most employees still guessed incorrectly. We flipped a second virtual coin to decide whether to “correct” their misperception about the peer salary.

We saw that finding out peers get paid more does have a negative effect on the employee’s effort and performance. Finding out that peers earn on average 10% more than initially thought caused employees to spend 9.4% fewer hours in the office, send 4.3% fewer emails, and sell 7.3% less.

This evidence suggests that it might not be wise to motivate individual employees through raises alone. If you increase the pay of one employee, that employee may work harder but the rest of the peer group could work less hard. You can avoid this by motivating employees through the prospect of a higher salary attached to a promotion. In other words, keep salaries compressed among employees in the same position, but offer them large raises when they get promoted to a higher position.

Our research raises the question: should you increase pay transparency at your company? Though surveys reveal most employees wish their employers were more transparent about salaries, the majority of firms maintain pay secrecy policies. But there is little evidence on how transparency affects the outcomes that managers care about. It is possible that managers choose pay secrecy because they think it is in their best interest when in fact it is not.

You may not need to worry too much if one of your employees catches wind of your salary. Employees in our study tended to underestimate the pay of their managers, and learning the actual amount led them to work harder. This degree of pay transparency seems to have given employees a sense of their earnings potential, driving up motivation. But we need further evidence to better understand how to best leverage transparency to promote productivity and employee satisfaction.

Of course, we must remember that salary information is sensitive, and thus there can be such a thing as too much transparency. For example, the majority of employees participating in our study were in favor of increasing transparency in an anonymous fashion, by reporting average salaries by position. However, when the same employees were asked about increasing transparency in a non-anonymous fashion, meaning their names and salaries would be shared, most of them opposed. And in a follow-up study, we found that most employees were willing to pay significant amounts in order to conceal their own salary from coworkers.

Many U.S. policies promoting pay transparency are mandating complete, non-anonymous salary transparency. For example, some states like California and New York publish online lists with the full names and salaries of every state employee. We think a wiser approach is what our study participants called for: transparency about average pay for a position, without disclosing individual salaries.

We encourage you to start experimenting with transparency at your company. The first step is to figure out what your employees want. You can find out through anonymous surveys. Just mention some alternatives that you consider viable, and let them voice their preferences. For instance, do your employees feel informed about their salaries five years down the road? Would they want to find out the average pay two or three promotions ahead? Once you look at the survey results, you can decide what information to disclose and how. According to our findings, signals about the enticing paychecks waiting five years in the future is the push they need to be at their best.