When Salaries Aren't Secret

Imagine all your employees knowing each other's salaries. Guaranteed disaster? Or a radical approach to building fairness, trust, and a highly productive work force?

The Idea in Brief

Fictional clothing retailer RightNow! faces a crisis: A vindictive employee published everyone's salaries—exposing inequities that had crept into the compensation system, and sparking outrage among workers.

Could RightNow! turn this disaster into a positive opportunity by creating a deliberately open salary system? After all, salary transparency is hard to avoid, given today's information accessibility. But it also raises prickly privacy issues and lets rivals poach more easily (they know what to offer to snag desirable employees).

On the other hand, a radically open salary system could yield major benefits:

• a fair compensation system based on actual performance

• employee understanding of the business (e.g., why payroll is usually the largest cost; why certain employees earn more)

• a culture of trust, as employees and senior managers share more information

Or should RightNow! keep its system closed and address inequities in more traditional ways?

The Idea in Practice

RightNow!—and any company—must balance the inherent tensions between tight labor-market demands and perceived inequities within the firm—i.e., external market value versus internal equity. For example, young employees with "hot skills" are often recruited from the outside and paid 25% more than older, more loyal, and longer-standing employees within the same department.

Four commentators on this HBR case offer advice about experimenting with compensation systems' openness and flexibility, and competing for talent more effectively:

1. Stop using pay as a primary weapon in the fight for talent.

• Emphasize non-monetary advantages of working for your company—professional challenges, stimulating colleagues, growth, fun, excitement.

• Recruit individuals who are ready for the job but have not yet been promoted to an equivalent level in their own firms. This "value hiring" lets you grab "bargains" and pay market value for the position.

2. Create a more collegial, open system with some salary transparency.

• Create and publish salary ranges ("bands") for all jobs. Involve employees in developing this system, including setting the ranges and establishing the criteria for merit increases within each range.

• Create enough variation within each range to absorb labor market and individual performance differences. This lets everyone know the potential of their current jobs and their career opportunities within the company—without knowing what others make.

• Post job salaries, but without attaching individuals' names. This protects people's privacy and keeps competitors from easily knowing what to offer to poach particular individuals.

3. Create a rigorous performance-based pay system.

Compensation transparency is most useful if it ensures that employees know why they earn what they do—and how they can earn more. Knowing what others make is much less important. Some radical suggestions:

• To dramatically boost productivity, negotiate employees' pay project by project, based on the value of work done. Define objectives and tie rewards to meeting them.

• Eliminate your Human Resources department and let managers and employees set salaries—but only after getting input from others that establishes the value of and compensation for each contribution.

Before it's here, it's on the Bloomberg Terminal.