We explore the common assumptions in reward that could be holding back improvements over a series of blogs. In this edition, let’s interrogate pay transparency.

As we discussed in part one, making assumptions is something we humans are wired to do; psychologists believe that our brains are designed to look for patterns and will make assumptions based on previous experiences. In some situations, this can be beneficial, even critical. In others, assumptions can restrict and damage.

In part one we explored assumptions around motivations. Now for part two, we will look at transparency in the reward system and explore the assumptions around homogeneity that can be hampering the success of the compensation approach.

Reward is one of those spaces in which assumptions can be a shackle, especially at a time of immense change in the world of work. Using assumptions to underpin rewards can stifle creativity, innovation and positive development in the system and prevent either the organisation or the workforce gaining maximum benefit from rewards.

Challenge established assumptions on transparency

The assumptions surrounding transparency in reward – which in this context refers to the openness and accessibility of information about compensation and benefits – are complex and ambiguous. We also must pay attention as to whose perspective the assumption is being made from: employees may assume differently to the employer.

Some of the assumed benefits of pay transparency are that it promotes fairness and equity, tackling issues such as the gender pay gap, and this in turn simplifies negotiating contracts because technically everyone has access to the same information.

Pay transparency is also assumed to foster trust and loyalty and, crucially, motivate staff to be productive and more effective for the organisation. It will also, surely, attract talent and improve retention. Sounds like a perfect solution!

However, there can be unintended consequences from pay transparency that could seriously undermine the intentions of the organisation and the expectations of staff. Some research studies have found that transparent pay can foster resentment and jealousy among staff, undermining collaboration. It can also give rise to cheating or reward-seeking as staff know exactly how to ‘game’ the system to their own advantage.

The ideal of transparency often fails to factor in the sheer complexity of reward systems and trying to unveil the workings may confound staff rather than empower them, or lead to confusion and resentment. They may, for example, suddenly see the pay as less generous simply because they understand the workings of it. The flipside of this is that, in a bid to simplify pay, organisations’ transparency leads them towards a one-size-fits-all solution which can never be effective or satisfying in a business as each one has diverse operations, staff, needs and expectations.

A greater transparency within the reward systems and practices may lead to a rise in complaints from staff about their compensation and benefits not being as high as they expect, based on their understanding of the principles and criteria. This would be directed and managed by the supervisors, not the reward experts who designed and communicated the system. In turn, these complaints could compel the middle managers to make performance-based incentives or discretionary pay elements more similar across the staff that report to them, as a means of coping with the psychological toil of negativity and keep the team together.

Evidence has shown that this ‘compression’ of rewards leads to further disgruntlement and staff often start actively seeking the personalised, non-observed options in their reward package (such as health and wellbeing add-ons or training opportunities) as a way of ensuring they feel valued and fairly compensated. Managers will likely support this to keep the peace, growing the non-transparent area of the reward system. Transparency could be a self-defeating approach unless managed carefully.

Who is doing the assuming?

As the organisation designs and delivers the reward systems, the employers’ assumptions are often leant most heavily on. The employer often assumes that a transparent pay system best demonstrates the organisations’ values and culture, while keeping an eye on the legal and ethical considerations of such a system, as laws vary by country while ethical and cultural preferences can be subjective and highly complex. The employer would also welcome the assumption that pay transparency will keep them safe from accusations about pay discrimination.

It goes without saying that employees will be making assumptions about a transparent pay system from their own, entirely different perspective. They may assume that transparency will automatically clarify why they are paid for what their position, contribution, experience, or skills are. It will give them a value and a sense of worth.

However, this relies on the reward system being clearly communicated and the employees’ expectations being roughly matched by the reality in terms of pay. It could be disappointing, or too complicated to understand, the differences in salaries are due to subtle factors like performance or experience.

Employees might also assume that knowing their co-workers’ salaries won’t affect their relationship with that person. This might be true in some cases, but not for all and could damage a team’s moral and lead to jealousy and resentment.

Does transparency lead to fairness?

As touched on above, pay transparency can be a valuable tool in achieving fairness and pay equity – these are certainly all related, yet they remain distinctive concepts that operate independently. One may not automatically lead to the other.

Pay fairness, broadly, refers to the overall justice in how compensation is distributed within an organisation. It includes considerations of external and internal equity, individual and procedural fairness, and distributive justice. Pay fairness considers whether employees are paid fairly for their work in comparison to others within the organisation and beyond it. It concerns itself with whether the processes to determine pay are fair and transparent.

There are plenty of assumptions made about fairness and equity in the reward system, presenting ample opportunities for error unless assumptions are recognised and interrogated. We will delve into the assumptions around pay fairness and equity in the next blog.

TR2050 Members can look forward to discussing this issue at the upcoming virtual Think Tank meeting in August 2023.