Pay transparency can shrink the gender pay gap, but hurt bonuses

Pay transparency can meaningfully reduce the gender pay gap, a new study found, even though it also reduces bonuses and other rewards for job performance.

The findings come as more states implement new pay transparency laws to even the workplace payrolls.

The gender pay gap was slashed by up to 45% in transparent organizations compared with those that didn’t disclose pay, according to the study published in the journal “Nature Human Behaviour” that tracked detailed performance, demographic, and salary data for nearly 100,000 U.S. academics between 1997 and 2017.

“Our evidence showed that pay transparency causes significant increases in both the equity and equality of pay, and significant and sizable reductions in the link between pay and individually measured performance,” Tomasz Obloj, associate professor of strategy and business policy at HEC Paris told Yahoo Money. Oblog worked with Todd Zenger, professor of strategy and strategic leadership at the University of Utah’s business school, on the study.

But bonuses took a hit, the study found, with achievements on the job less rewarded when pay was made public.

“The link between pay and performance was significantly weakened, by about 40%, meaning in this case those higher academic salaries were less closely tied to observable measures: number of academic articles in peer-reviewed journals, number of published books, number of academic awards, number (or value) of grants, and number of patents,” the study found.

More states are requiring wage disclosure

Disclosing pay has long been hush-hush in the job market. Nearly half the full-time workers in this country are either discouraged or prohibited from discussing salaries, according to a 2021 report by the Washington, D.C.-based Institute for Women’s Policy Research (IWPR).

But taboos are shifting. As of December 2021, seven states have enacted laws requiring employers to disclose salary ranges to job applicants. In addition, both Massachusetts and Pennsylvania have pending legislation. Starting in May, New York City employers with at least four employees will have to post a minimum and maximum salary for jobs they’re trying to fill in the city.

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“The thought is that by making things more transparent and giving women a better sense of what the pay range is, they will do better in negotiation, and the gap decreases,” Lise Versterlund, a professor of economics at the University of Pittsburgh and co-author of a forthcoming book “The No Club: Putting a Stop to Women's Dead-End Work,” told Yahoo Money.

Recent academic studies like the one conducted by Obloj and Zenger show how pay transparency can help people of color and women achieve pay equity.

“I found it encouraging how consistent the results were across states, institutions, and academic domains,” Obloj said. “This potentially indicates that pay transparency could be a powerful tool to remedy reward inequities in a variety of contexts and occupations. Pay simply becomes more equal.”

Many employers are far from enthusiastic about disclosure

That said, “resistance to pay transparency within the private sector remains quite deep-seated,” according to Obloj and Zenger.

The problem is that while pay transparency is great in terms of boosting awareness of gender and race equity and equality, the flip side is that it makes it harder for employers to financially reward employees based on their actual high performance or contributions since that evaluation can at times be subjective. And that can put a damper on motivating workers to go the extra yard and can make attracting talented new workers harder if they don’t see the upside for their individual efforts.

Versterlund’s research backs up this reasoning, which links a decrease in the gender pay gap with depressed overall wages.

“When you can see what everybody's making, it makes it really hard for the individual to go in and improve their wage. The bargaining power for the individual really decreases,” Vesterlund said, noting that employers may be more reluctant to give a raise because other employees will ask for one afterward.

Is there a downside for workers?

In “Equilibrium Effects of Pay Transparency,” a paper published last year by The National Bureau of Economic Research (NBER), Zoë B. Cullen, assistant professor of business administration at Harvard Business School and Bobak Pakzad-Hurson, assistant professor of economics and entrepreneurship at Brown University, also found that transparency reduces the individual bargaining power of workers, leading to lower average wages.

“A key insight is that employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others under transparency,” they wrote. “Although pay transparency has been in the political and popular spotlights due to its perceived benefits to workers, its effect on wages and hiring are not well understood.”

And that’s concerning.

“Pay transparency is wonderful, and it does decrease the gender pay gap. Unfortunately, it’s a small fix to a much larger structural problem,” Versterlund said. “We need to find the middle ground in terms of what information that we're revealing. And the truth is, it's actually a pretty good deal for the firms and the organizations, because unless we're thinking carefully about what it does to all wages, the wages they pay employees could very well drop on average.”

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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