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The payslip left accidentally at the copier can spark a riot. Or, at the very least, simmering resentments and at least one slammed office door.
Salaries are enormously sensitive. Nothing is as demoralising as finding you are paid less than your slacker co-worker, whose contribution to the company bottom line is, frankly, negligible.
Now some US companies (including the prominent retailer Whole Foods) are taking the drastic step of disclosing all salaries to employees.
They argue that salary transparency can help to address inequality, in particular the gender wage gap. They have a point. Unfair practices flourish when salaries are kept secret.
Take the recent impact of pay disclosures in Hollywood. There was a huge outcry when leaked emails revealed Oscar winner Jennifer Lawrence had earned much less than her male counterparts in the film American Hustle.
The topic of gender pay discrimination has barely been out of the news since, and in a subsequent film, Lawrence negotiated a much sweeter deal, earning at least $8m more than her male co-star.
Transparency also promotes a culture of trust. If a company is open about what people are paid, it sends a powerful signal about how it manages its business.
Salary secrecy means there is constant speculation among workers to try and figure out whether they are underpaid compared to their colleagues. Apart from the fact that this is unproductive, the uncertainty breeds miscalculation.
Professor Jannie Rossouw, head of the School of Economic and Business Sciences at Wits University, has conducted surveys at two different employers to measure what employees thought their co-workers and superiors earned – the majority got it completely wrong.
One US study showed that more than two-thirds of workers assume they are underpaid. Fact is, many people who think they are underpaid (and adjust their output accordingly), may be proved wrong when salaries are revealed.
In South African workplaces, remuneration can be particularly toxic. Our legacy of systematic prejudice can create an environment of distrust, where employees may be quick to blame salary discrepancies on discrimination if they don’t understand how their remuneration is calculated, says Dr Tim London, senior lecturer at the Allan Gray Centre for Values Based Leadership at the University of Cape Town’s Graduate School of Business.
From a legal perspective, nothing prevents a South African company from revealing salary information to all employees, says Pieter Human, director of the labour advisory service Labourwise.
However, he believes true salary transparency can only work in companies where the wage and skill gaps are relatively small.
“In the typical South African company, revealing large pay differences (even if linked to specialised skills) could create such dissatisfaction and resentment that the potential benefits would be completely overshadowed.”
How to use remuneration to create engagement
Even if a company isn’t willing to reveal all salaries yet, managers can use remuneration as a powerful tool to create engagement:
Step 1: Educate employees about their remuneration
Often employees don’t understand the full value of their pay package (including pension and medical fund contributions) and their total cost to the company, says Rossouw.
Explaining all components of a salary can help establish trust with employees, and defuse resentments.
Step 2: Have clear salary formulas, or defined pay scales
Companies should have a transparent process to determine salaries, says London. Workers who can’t see a link between pay and performance quickly become disengaged, which is bad for productivity.
If possible, employees should be involved in discussions about the key drivers of the company’s performance, what they can do to contribute to performance, and how these contributions should be rewarded.
Importantly, these contributions should be linked to the values of the company, says London. This is particularly important when not all outputs are quantifiable.
“If you work for a firm that values creativity, for example, your remuneration could be based on how creative your outputs are.”
Salary transparency proponents say clear pay scales and formulas to calculate remuneration are particularly helpful for people (often women) who aren’t forceful salary negotiators.
In fact, if a company has a clear remuneration policy and formulas, these negotiations can be avoided all together.
Step 3: Ensure that everyone knows what they need to do to earn more money
The way higher up the pay scale should be well-defined. If workers see a clear link between what they need to do to bolster the company’s performance and their pay prospects, this could potentially have a powerful effect on growth and the bottom line.
Step 4: Have constructive individual conversations with employees about pay
Managers need to be frank, but sensitive, when discussing how a team member’s pay is calculated, how they can earn more and what they are worth to the company.
Step 5: Lead from the top
Excessive remuneration has become a particularly fraught issue in South Africa, which has one of the biggest income gaps in the world. It is time for top CEOs and boards to commit themselves to greater transparency and prudence when determining remuneration packages, says Rossouw.
“To pay a CEO of a large bank R28m is not justified, as it is not commensurate with the risk that the person is taking on.”
He believes the link between performance and remuneration should be well-defined, starting from the top.
“If I had to start a company now, I would plaster everyone’s salaries (including my own) on my office door,” he says.
This article originally appeared in the 21 April 2016 edition of finweek. Buy and download the magazine here.
