Should Pay Policies Be Secret or Open?
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Should Pay Policies Be Secret or Open?

Companies are often unsure about the effect of secret or open pay policies on employee morale and productivity. One current concern of behavioral scientists is the relationship between an organization’s secrecy regarding pay policies and the motivational effectiveness of these policies. If secrecy has an adverse effect on employee motivation and performance, some writers believe, a move to more openness may need to begin. A survey of personnel executives conducted by the Bureau of National Affairs in the United States indicates that pay-policy secrecy is severe below the managerial level. Among the 184 organizations responding to the survey, nearly three-fourths have a written statement of the firm’s basic compensation policy, concerning such matters as paying competitive salaries, when employees can expect wage increases, and how raises are determined.

Companies are often unsure about the effect of secret or open pay policies on employee morale and productivity. One current concern of behavioral scientists is the relationship between an organization’s secrecy regarding pay policies and the motivational effectiveness of these policies. If secrecy has an adverse effect on employee motivation and performance, some writers believe, a move to more openness may need to begin.

A survey of personnel executives conducted by the National Affairs Bureau in the United States indicates that pay-policy secrecy is severe below the managerial level. Among the 184 organizations responding to the survey, nearly three-fourths have a written statement of the firm’s basic compensation policy, concerning such matters as paying competitive salaries, when employees can expect wage increases, and how raises are determined. However, the policy statements are not always communicated to all employees; nearly one-third of the companies that have such statements distribute them to managers only. And in 28 percent of the surveyed companies, employees have no way of looking up information on where they stand in relation to any wage schedule, that is, they don’t know whether they are being paid the bottom, middle, or top rate for their particular job. Employee access to information on wage schedules for job categories other than their own is even more limited.

In several cases, information is available only for union-represented employees, a fact that bothered at least one survey respondent, the vice-president for industrial relations of a manufacturing company. He felt that “lack of information to employees about their salary and why others are paid more is an important reason why employees organize into unions and why attitude surveys show poor morale on the salary question.”

What about information on management salaries? Responses to the survey pointed out that in less than half the companies do management personnel have access to salary schedules applying to their own level in the institution, and in only 18 percent do they generally have knowledge of the salaries of other managers. Of the comments offered on this matter, one-fourth clearly supported more openness and others indicated conflict on the issue.

Secrecy

Comments from the survey respondents indicated reasons why some prefer secrecy about pay policies: “Secrecy prevents much quibbling about who gets how much and why.” “Open systems too often create misunderstandings and petty complaints because published rates and ranges in a merit program act as a demoralizing factor, not a motivator.” “We’re in a growth situation where new jobs are being created and salary differentials may be difficult to explain and justify.” It is obvious that inequities and openness are incompatible; one comment read, “Open’ systems require that there be no inconsistencies, our program has not achieved that level of perfection yet.”

The advantages of more open pay systems cited by the personnel executives relate primarily to better relationships, confidence in the compensation system itself, and trust in the organization. None of the respondents mentioned the motivational aspects of pay as the primary reason for preferring openness; the concern seems to be, rather, with providing a system that will lessen dissatisfactions. According to some experts, however, money can be a motivator, and personnel administrations should be concerned with providing a compensation system that will result in better job performance.

Research

For years, certain behavioral scientists have lamented the lack of reliable study or research on compensation policies, a lack that is partly due to the secrecy problem itself. Most business firms try to guard their salary secrets well.

One question that has been explored is the effect that secrecy has on manager’s perceptions of the pay of other managers in the organization. Edward Lawler’s studies on this point have shown that managers lacking accurate information tend generally to overestimate the pay of managers at lower levels and to underestimate the pay of managers at higher levels.  Perhaps one effect of this is that a manager may not strive for a higher-level job because he doesn’t perceive that it involves any sizable increase in compensation. Lawler also found that most managers believe their pay is too low, and he concludes that this dissatisfaction stems from misperceptions resulting from pay-policy secrecy.

Another kind of research has dealt with the question of which employees would prefer a more open pay system. Among managers in general, it appears that about two-thirds prefer the traditional secrecy; and an investigation found that the better performers prefer secrecy slightly more than poor performers.

The question concerning secrecy vs. openness in compensation administration will undoubtedly be debated and the answer undoubtedly will be the similar answer to most questions pertaining to employee relations policies. It depends on the organization, its history, its employees, its managerial climate. Although no one is yet advocating wholesale adoption of a complete openness philosophy, the current questioning of secrecy in pay systems does raise the possibility of making compensation decisions public. In many organizations this possibility may be regarded as a threat towards the department head who has been known to play favorites in awarding raises, to the supervisor who gives everyone in his work group a “merit” increase every year rather than face the unpleasant prospect of telling poor performers why they are not getting an increase, to the personnel executive who permits these practices to continue. As one BNA survey respondent pointed out, “the nationwide trend” toward more open pay practices has “caused some ‘traditional’ relationships to be reevaluated for good.” If the very possibility of openness results in more equitable pay systems, then money will, in fact, be a better motivator of employee performance throughout the organization.

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