Pay Transparency and Inequality Concerns: Productivity and Job Satisfaction

Although pay transparency is generally effective at reducing the gender gap, it is not without downsides, sometimes leading to reduced productivity and lower job satisfaction due to inequality concerns. Yet, workers could have different objects of comparison: income, utility, or rewards. Across these different types of inequality concerns, when does pay transparency result in both higher output and fair outcomes? The authors consider a model of moral hazard involving a principal and two agents of heterogeneous abilities who are averse to inequalities between each other. They study three bases of comparison: income, utility, and reward. Anticipating the agents’ change in behavior as a result of pay transparency, the principal adjusts the terms of their output-sharing contract with them. They find that pay transparency under income comparison never benefits the principal and might give rise to feelings of guilt and envy—thus reducing agents’ utility. In contrast, under reward comparison, it is always beneficial to the principal and results in fair outcomes. Under utility comparison, it lies somewhere in between, offering a higher payoff and fair outcomes when agents are not so heterogeneous, but hurting them without changing the principal’s payoff otherwise. In sum, they find that pay transparency has the potential for increasing productivity without negative feelings of fairness. However, the object of comparison matters. Therefore, it is paramount for organizations to contextualize income information to shift employees' concerns away from income to either utility or reward considerations by adopting process transparency in addition to outcome transparency.