Published on: April 4, 2025 at 3:41 pm
Pay transparency can lead to pay compression, in which employees’ compensation—regardless of whether they’re long-tenured or new, high-performing or just sliding by—tend to cluster around an average or median level for a particular role.
Academy of Management Scholar Peter Bamberger of Tel Aviv University said that people perceive their employer’s compensation structure to be unfair tend to leave the organization. In those cases, pay transparency can interfere with employee retention goals. But he’s found in his research that pay can be a moving target, where pressure to recruit can drive up new hires’ compensation, higher than longer-tenured employees serving in similar roles.
“It’s important to see what the impact of pay transparency is on individual behavior, but we also want to see what happens with turnover rates at the firm level,” Bamberger said. “The argument was based on several research papers in economics in particular with consistent findings that when pay becomes more transparent, it also becomes more compressed.
“Essentially, managers differentiate between stars and poor performers less and give everybody more or less the same or a similar raise and bonus,” he said.
While the economists didn’t really look at the mechanism as to why that is, Bamberger and his colleagues did examine that and came up with a theory to explain the trend.
“The argument is that managers are kind of lazy, and they prefer not to have to deal with an employee coming in and demanding that they deserve more than someone else,” Bamberger said. “So when pay is transparent, regardless of differences in individual contribution, they just give everyone the same level of pay increase or bonus.”
