Research reveals that pay transparency reduces job turnover – but that’s not the whole picture

Positive levels of trust and organisational culture have a higher return than full disclosure of pay.

Declaration of executive pay has long been on the news agenda, with particular emphasis on the pay gaps between the highest and lowest paid workers in a company. Now, research by PhD student Rosanna Stofberg has explored the link between pay transparency and job turnover intentions – a first for the South African context.

The outcomes may help reward practitioners to understand the impact of pay transparency in their companies.

Pay transparency is a controversial topic, with some companies keeping remuneration highly confidential, while others disclose full details of employee remuneration. Most companies tend to land in the middle, with transparent grading systems and associated salary ranges for roles within the organisation.

The research project, which surveyed 300 employees from four organisations with different pay transparency practices, and interviewed 20 survey respondents for further details, found the following:

  • Increased levels of pay transparency (disclosing more information about pay to employees) was associated with lower intentions to leave;
  • The type of organisation plays a greater role in people’s intention to leave than the role of pay transparency;
  • The overall organisational culture and practices had a strong impact on employee perceptions, far stronger than the impact of organisational pay practices; and
  • Employees have very diverse views on pay transparency, with some not understanding the concept, while others had a very high understanding. Most employees were comfortable with whatever level of transparency they received, seeing it as normal.

Organisational culture
Organisational culture is critical and had a big impact on how employees perceived all aspects of their employment, according to the research. Each of the four organisations had quite distinctive cultures. One had a strong sense of family and belonging, for example, while another had a high-performing, “work hard, play hard” culture.

The research also highlighted that when there were problems with the organisational culture – for example, poor leadership or a culture that permitted unfair treatment – this impact was also significant.

Essentially, in a culture with high levels of trust and where employees are shown good and fair treatment across many dimensions, an organisation may have no need for transparency around pay – employees implicitly trust that they will be treated fairly in this regard too.

Conversely, in a low trust environment and where employees may have experienced general patterns of unfair treatment, even a fully transparent pay approach may not be sufficient to create positive perceptions and may generate negative outcomes like lower morale and employee resentment.

The research findings provide three recommendations for human resources and reward practitioners with regards to pay transparency and job turnover:

  • Follow a moderate approach to pay transparency, which entails clarifying the processes used to set pay and to adjust it, as well as providing information about the salary range, even the average salary, for each job;
  • If practitioners are trying to shift outcomes like job turnover, efforts would be better directed at factors that improve organisational culture and climate, and of these, pay transparency is likely to have a small impact; and
  • Pay transparency may still be worth pursuing from a pay equality perspective.

Furthermore, the research notes that practitioners may find that greater pay transparency gives impetus to reducing inequality and discrimination.