Pay transparency and productivity

Research Summary: This article investigates the productivity consequences of pay transparency. Tracking the research output of 20,000 US academics and leveraging staggered shocks to transparency, we show that productivity responses vary predictably based on what pay transparency reveals. We reject a hypothesis that pay transparency leads to a decline in productivity. Rather, we find that those who transparency reveals to be inequitably overcompensated subsequently increase their effort, while those inequitably undercompensated subsequently weakly decrease their effort. Controlling for such pay inequity, the simple level of pay has little effect on productivity. Our study provides one of the first field-based empirical investigations of the productivity consequences of wage transparency and points to the importance of clearly delineating the effects driven by equity as opposed to equality of rewards allocations. Managerial Summary: While evidence suggests that pay transparency consistently reduces discrimination, many organizations have resisted implementation over concerns about its impact on productivity. To date, there has been very little evidence to either confirm or reject this concern. This study of 20,000 US academics directly addresses the effect of pay transparency on productivity. We find that when salaries become public, average productivity does not decline. However, there is a varied individual productivity response that depends on what transparency reveals to individual employees about their pay and its fairness relative to peers. Employees who found they were paid more than their performance warranted increased their productivity, likely to justify their elevated compensation. Conversely, unfairly underpaid individuals decreased their productivity, particularly when they had job security. Notably, individuals seem to care more about pay fairness than pay equality. Our results also highlight another benefit of pay transparency: employees who became aware of the potential for substantial salary raises through promotion enhanced their productivity.