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Why Companies Keep Pay a Secret

smartmoney.com

51 pointscwan64 comments

It really seems like you have two options:

Classic corporate style: all salaries are private, and management has total flexibility in how salaries and raises are calculated.

Fog Creek style: there's a grade system, salaries are near-public (or easy to figure out), and management is locked into pay brackets; a trade of flexibility for transparency.

What doesn't seem to work is anything in between. If everyone knows everyone else's salary and management does flexible incentive/retention/recruiting salary calculation, the situation devolves to "Incentive Pay Considered Harmful"-style teamicide as people snipe at each other and invest cycles in cultivating resentment about perceived pay injustices.

An employee might reasonably prefer one style or the other. It's probably nice not to stew all day wondering if the guy slacking off next to you is making more than you, but it's also nice to know that if you talk to your manager, make an arrangement, and then just completely rock out for a couple months, you can achieve an arbitrary pay bump. "Classic style" is more entrepreneurial.

I agree with that. There's some of the latter going on in science academia lately. Pay used to be Fog Creek style, determined almost entirely on a mixture of years of service (civil-service style) and rank. An Associate Professor with 8 years of experience got a certain salary; a Distinguished Institute Professor holding a Prestigious Chair got the salary associated with that position. Pay and raises were fairly easy to figure out (approximately) because they were entirely tied to these public ranks. There was still a lot of politics, but the ranks at least have some social legitimacy: people are willing to accept that the Named Chair of Particle Physics should be paid more than an Associate Professor of Physics.

As things have become more market-like, it's become a lot more flexible (mainly in science/engineering). A junior professor might get offered more than a more senior and prominent professor because the school is trying to lure her away from elsewhere, or really wants to fill a particular hole, or just because of competition (if someone has offers from three schools, yours has to be in the same ballpark). At private schools, this is sometimes handled classic corporate style, but it's not that private, because sometimes faculty votes are involved in the decision making.

At public schools, this combines with sunshine laws that make any state employee's salary viewable in online databases (in some states). This causes all sorts of shenanigans. Now you have professors realizing that they're paid $90k while someone much less accomplished in the same field is paid $110k, due to the histories of who got hired when. So they're going to need to be offered $120k, or else they're going to threaten to move (and there's a whole bluffing and bluff-calling game in that). This also creates the perverse incentive that people who move around a lot, or at least interview around a lot and solicit external offers on a semi-regular basis, are generally paid more than those who focus their energies on one university's research/education programs.

Overall I don't think it's been a good change for there to be both: 1) disparity in pay that is not tied to clearly public things like Distinguished Professor versus Associate Professor; and 2) that pay disparity to be public, so colleagues know who makes more than who.

As a brief anecdote, I was completely shocked by what some professors earned at the public university I attended. I had several standard professors in finance and accounting who made ~$150-200k/year plus freelance consulting at $500+/hr. If more people knew of the salary potential of being a professor, universities might get more quality applicants.

These high salaries -- medical/law/architecture/business/etc are the same way -- are required in order to lure the superstars into academia and away from private practice. The highest paid professors at my public university were paid $500k+, with the top handful being at $1m +/-$100k.

That's definitely the reason, but I'm not sure it's always worth it. The fact that someone can earn $1m in the private sector doesn't automatically mean that they'll provide $1m worth of value to any university that hires them; the skills aren't identical.

Might be less true in areas where being prominent is a ticket to bringing in a ton of grant money; some famous medical researchers essentially pay their own salary out of grants, in which case from the university's perspective they're free.

This is a because a professor of finance or accounting also has the credentials to be a CFO (or even CEO). They're in demand and that's the price that the market will bear. There is probably a similar effect in computer science, engineering, medicine and related fields.

Of course. Most people just don't think you can earn that kind of income in academia.

I much prefer the Fog Creek style, where incoming employees can immediately see a clear career path, which is good for loyalty and maintaining an institutional knowledge. And those are two things I feel a lot of companies severely undervalue in favor of keeping salaries below market rate.

A clear path is good...until there's a roadblock.

I just left a company that had a pileup of engineers at the end of the Junior 1-Junior 2-Senior 1-Senior 2 track. The next step up was Principal Engineer (or something like that) and there were only so many of those allowed. And those guys weren't quitting anytime soon.

I figured there were only so many bumps they could give me before I hit the ceiling and stayed there for a decade, so I bailed.

Definitely, but I think that's a situation that should have been addressed by that company, and I don't know if it translates into an argument against a clear career/salary path. They were always free to create new positions or levels.

That definitely was happening to some degree. To me it implied that there was a problem in this whole "ladder" idea when they had to keep invoking Zeno's dichotomy and adding more intermediate steps between Major Title 1 and Major Title 2 to keep people around salary-wise.

I don't know how workable it would be, but I always liked the idea of management's base pay being the average of everyone that worked for them. Any bonuses would have to be a multiple of that base pay; to include stock.

This would ensure that the base salary only goes up if the average wage goes up and clearly define the bonuses. At least for those where the bonuses are published; I'm thinking SEC filings and the like.

In practice it probably wouldn't change much though.

Why do you care what management makes? They aren't your peers. Totally different job.

Because it gives you insight into what your company believes matters and contributes value to the company.

That's all well and good, but managers often have a different incentive structure than normal employees; a manager might command a significantly higher salary, but be out on her ass if her group doesn't meet business performance targets that depend on every member of her group and her own business judgement. An extremely common example in services companies: managers are often responsible for their region's number.

Some of them are, I report to the CIO directly and sit on the Corporate Compliance board of the organization. I care because I think something like that would make more organizations accountable for being reasonable with executive and management pay.

My high school, a few years before I got there, once decided to post the teachers' salaries in the lounge for all the teachers to see. The salaries had no names next to them, but since they did list the length of each person's tenure, the teachers deanonymized the list quickly.

There was a ruckus when people discovered that a lot of the worst teachers were making the most money. Your salary was basically determined by how frequently you had the nerve to ask for a raise, plus some consideration for how long you'd been at the school. Not exactly a winning compensation scheme.

If your compensation scheme is well-reasoned and defensible, it's a lot less of a problem when people figure out how much everyone else is making. If your compensation scheme sucks, expect outrage.

Actually, almost all teacher salaries are based on length of service (via union contracts). Teachers seldom, if ever, are paid according to performance (at least in public schools).

edit: How did this go from +4 to -1? I was just pointing out that in the US, most teachers at public schools have salaries that are set via length of service. Downmodding on HN has really gotten out of hand.

Wasn't karzeem was describing how it is at karzeem's high school?

Nearly all public school teachers are NEA members, and the NEA strongly opposes pay based on anything other than seniority.

The NEA opposes it, but they haven't been able to completely stop it, especially since Obama's been a big proponent. The Teacher Incentive Fund allocated $200m conditional on underperforming schools adopting performance-pay plans, which has caused some to switch (e.g. Seattle has a trial program).

It's a private school, so it's relatively free to set salaries as it pleases.

I think defensibility is one reason why companies have their pay secrecy clauses.

People don't like confrontation, in general, and asking for a raise is one kind of confrontation, so people are slightly defensive (and thus slightly irrational).

If they're then made to defend those choices, they have to give clear reasons on WHY they gave the aggressive negotiatior whose not great at coding a raise, in lieu of the star performer who does badly at human tasks. Since there's no nice way to do so, they'd rather just avoid the situation altogether.

I've worked for quite a few companies over the years who had made it a firing-offense to discuss salaries at all in the workplace. This made negotiation your top skill in the company - not the quality of your work, nor the quantity of your work.

While this didn't stop employees from finding out who made what, it slowed it down, and it did little to reduce the sense of unfairness.

Folks who tend to go into managerial tracks tend to think that everything is negotiable. While techies tend to be poor negotiators. This results in an arms race where one side is unarmed.

Absolutely. Very few people in western countries are comfortable negotiators. The reality is that most things are negotiable, but the everyday consumer experience is crafted to ensure that average people crumble at the thought of negotiating.

For every employee who is comfortable renegotiating compensation, there are a dozen who will stew in silent resentment waiting for raises that never come rather than engage in a task they hate and fear. Level-based systems with standard salary ranges and regular evaluations are superior for that reason alone. (Unless your goal is to have unhappy and unproductive - but cheap - employees)

I've worked in a company where they avoided negotiation altogether. The CEO set raises based on 'input' from the department managers. That manager then passed the raise on to the employee. The employee didn't even know when this process would occur, but it was always before the annual review.

Big shock, that company also didn't pay well.

IANAL, but as far as I understand it, in the US it is against the law to fire someone for discussing pay as this is protected speech. The is part of the National Labor Relations Act, http://www.nlrb.gov/Workplace_Rights/i_am_new_to_this_websit...

Few people probably know that, hence the effectiveness.

I looked this up, and as it turns out, in addition to the NLRA, there are also state laws that prohibit contract terms restricting disclosure of wages.

These are dumb laws (unless you're trying to start a union, i guess).

I worked for a company that fired two developers for disclosing salaries. (An executive put a spreadsheet of them on a public drive.) It wasn't just the difference in salaries that got people upset. It was the lies management had told when people had asked for raises: "Nobody makes that" or "You're already one of the highest paid developers."

A year later, when the company didn't make enough sales to pay bonuses according to their plan, they gave bonuses to a few select people. Oddly, rather than keeping this secret, they announced it in a company meeting. My favorite moment was one developer asking, "When will you be letting those people know?"

There might however be a huge advantage for 'underpaid' employee's to know they are not paid well.

if pay equates to skill, or productivity, which in America is the general idea, then underpaid employees are under performing ones.

Companies like GE will fire the bottom 10% annually. This is expensive and requires an administrative and legal cost. Underperforming workers are also usually unaware of there skill deficit. http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect Releasing salaries might make performance acknowledgement more visible.

As a result of measured ( not actual ) performance being more visible underperforming employees might seek a new job before getting fired or getting frustrated. It might also encourage employees to seek out better mentor-ship relationships.

I have even heard that on some scrum teams, there is a base salary for each employee and then a team bonus that get's distributed by your other team members, entirely in the open. The idea is that as a team you want the strongest team members to stay on your team so that all of you can look better. a sort of 'gamification' and 'collective bargening'.

i've always thought that keeping pay secret was lame. plenty of people in a company can social engineer a way to figure it out, and in a startup it means you have to do a ton more work to hide your financials from others.

i'm all for transparency and flatness.

Can you please elucidate the reasoning behind your assumption that underpaid employees are the underperforming ones?

At least for CEOs the opposite appears to be true: http://finance.fortune.cnn.com/2010/10/12/revenge-of-the-ove...

this is pricing to the market versus within the company. I guess i should have specified that employees should only price against others in a company. also salaries above $200k are silly. there are much better ways to fiscally reward a someone above $250k that are not so tax inefficient.

@cosgroveb, way to pick the edge case. in general CEOs should make enough that their incentives align with investors. everyone is in a different boat.

thanks for the clarification... hope i didn't come across as snarky. i think i did on re-reading.

if pay equates to skill, or productivity, which in America is the general idea, then underpaid employees are under performing ones

If you're hired and paid by honest people, yes. If you're hired and paid by the moral equivalent of a car salesman[1], your pay is probably based more on what they think they can get away with paying you.

How on earth do you do that without making the entire process a political nightmare?

[1] It's actually much worse than this. Your boss doesn't have to be a cynical car salesman trying to screw you out of salary to save money for the company. He could just be susceptible to the same old "the squeaky wheel gets the grease" treatment where people who ask for raises more often get raises more often.

_If you're hired and paid by honest people, yes. If you're hired and paid by the moral equivalent of a car salesman[1], your pay is probably based more on what they think they can get away with paying you._

Or they lack the ability to accurately judge people on their individual merits and/or abilities as a contributor. That is, a sales guy has a very clear cut idea of how much he's contributed. However, a guy who writes a lot of crappy code and causes problems for people that come after him would look stellar next to the schmuck who's got the untangle the mess he leaves behind. If management isn't technical...

i try not to work for car salesmen and in such a case it would be hard for such a person to fit into the company.

@philwelch, it falls into the category of anti-patterns. the idea is that because it's open and part of the process, its not hidden and so the politics of it are not hidden. additionally only those that want to work in such a pay scale would accept the job. so you are basically agreeing to get rated by your peers before you accept the job.

if you were to take an existing company and transition into this pay model you would probably see excessive attrition.

it also means that your peers are responsible for your raise, rather than someone who does not understand your work. if you feel undercut, you will leave, and if your work is valuable then the team will miss you, as you will effect their productivity.

again this is an anti-pattern is meant to disrupt normal strategies.

Yup. It's kind of like getting picking for a football team. If you're not good enough you sit on the bench. You can either try and improve your game enough to get back on the team, or leave to find another team that either appreciates your talents or operates at a lower level.

Just a data point: here in Norway, tax information (including income and assets) are published in the newspapers every year, and are freely available via web search. It's trivial to find out what anybody is earning.

Serious question. Do you look? And how do you think having this information changes people's behaviour?

I don't look-- I'm an American, and I find the whole thing skeevy. Many people do look, though.

I live in a small town, and the year before last I was actually the top earner in the town-- which got me a whole raft of unwanted newspaper and radio stories.

Meanwhile, the names of people convicted of crimes are withheld from the press. If you rob a bank, you can live anonymously. If you earn more than your neighbors, you're going to make the newspapers.

There are a lot of employers which have standard wage scales, so knowing anyone's salary is trivial with information like time of service. In the military, people wear their pay grade on their sleeve/collar/hat, so it's even more obvious. This doesn't seem to be a problem.

The biggest problem is if someone perceives pay as unjust. I personally plan to publish salaries internally for everyone, along with all budgets (projected and actual). The primary benefit is making it transparent how much various resources cost -- often employees aren't expected to take into account the costs of various activities, like a meeting which uses 4-8 engineers, or the overhead of various admin tasks (like spending $20 of time to document a $5 expense).

CEO (and other exec) pay seems to be most often out of line; Peter Thiel's observation about predicting the success of a company based on founder pay is great, and a founder making $0-60k/yr is in a much better position to negotiate compensation than a CEO (possibly founder) making $250k.

We have open books at the agency I work for. Its pretty darn good to be honest. No one is over paid and no one is underpaid. We are paid what we and the rest of the company think we are worth. Simple.

Well, kinda simple. When having an annual review you must present your personal development plan of what you have achieved in the past year, what you hope to achieve in the next year (and possibly beyond) along with how much of a raise you want. You then have a meeting with a review committee consisting of two normal staff and two directors where you discuss how fair and equitable it is to you and your colleagues, whether it is affordable for the company and whether it would be attractive to a potential new hire hypothetically replacing you. Proposing your own salary makes you really think about what you are worth, and if you want a higher salary can really motivate you into proving that worth and not just being a bum on a chair.

Its a lengthy process but everyone is pretty happy with it (there are few things that getted tweaked everytime soneone has a review but its an ongoing process of improvement). There is no way you can be paid to much or too little as someone on the committee will complain and your proposal wont get signed off. For example, a member of the board had to go back to the committee 4 times until they accepted his proposal, each time honing their salary level and what they will be doing for the company in return.

I'm not sure that opening your books like the article says is the best way to go. Salaries in most places are unbalanced and letting everyone know that would lead to proven disaster. It would be best to try and get them inline before opening them up for the employees to see, although i'm not sure how you would do this. Its just a shame the article make no mention of how great open salaries are.

ps, look up Ricardo Semler and Semco for en example of open salaries on a LARGE scale. Its not just little agencies that this can work for!

Great book by Ricardo Semler http://en.wikipedia.org/wiki/Maverick_%28book%29

All companies should be based on this.

Making salary information available is but one, small step towards greater employee satisfaction. If it is the only step - this can be disastrous. You essentially get the problems described in the article.

The company needs to give much more information than just the current salaries that got set by who knows what way.

First, the company needs to make available what the company is making - this is usually available but in some big numbers like earnings per quarter. If you are working on some product you need to know how much it sold and how much is likely to get sold in the next 6 months. You need to at least be able to know how much the company can afford in the end when all salaries together with all the other costs are added together to still be profitable.

Then you need to know the median salary for your job at other companies. These statistics are usually available - and if not can be found from recruiters.

Finally, you need to think about what is fair in your mind - how much does your husband make, how much does the neighbor make, your friends - compared to what they do? This is something you know and the company does not know about - but it does factor into how happy you are with your salary.

Armed with all this you are ready to set your own salary. This then can be seen by all others and a proper discussion can be done. Discussing things with all this in the open is at least possible. Everyone can participate and after a few months everyone will be armed with additional historical information about Joe the Slacker or Jane The SuperStar and if their salary is fair. If someone really thinks they deserve a huge salary regardless - they can always go someplace else if the majority of her colleagues disagree and get her fired.

Companies keep pay a secret because they want to minimize their payroll costs, and there is enough of a margin between value-of-employee and compensation-of-employee that its worth it to pay aggressive negotiators more.

Had to read the entire article to get to the important part

"...if dissatisfaction is a motivator, they'll end up better off."

I agree. Sometimes ignorance is bliss, but when it comes to your lively hood, I think knowing is better than not.

I'm suprised that effects were very widespread and evenly distributed.

The only people I have ever known to talk about their salary/wage seem to be union members (or other blue-collar professions). Electricians, teachers, machinists, elevator repairmen, etc. On the flip side I have never heard a programmer or other white-collar employee talk about their salary/wage unless they are griping about a previous employer/contract.

Given that most of the hourly university employees probably already know what the wage scale is I'm suprised an official publication of the data would have any effect on satisfaction.

My friends and I are actively trying to challenge this by discussing salaries and benefits openly. We've been told it's 'classless' by a few older mentors etc, but frankly I don't see how it's classless to discuss what you're selling your time for.

> likelihood of searching for a new job increased

This is a good thing for the job market. There might be some companies that have some better use for those employees if they want to pay them more. And if there is no such companies then dissatisfaction from pay might be impulse to improve ones skills.

It's the "last conversational taboo"? Isn't it really just no-one else's business if you don't want to share that info? Most people keep their bra size, weight, penis length, or preferred sexual kinks a "secret" too, and pay is just as personal and private to most people as those things.

That's all 'taboo' means. It identifies things we don't talk about openly, regardless of why.

Personally, I think the social disinclination to talk about salary is as manufactured for private gain as the whole diamond engagement ring 'tradition'.

The practical effect of secrecy in compensation is that employers have a massive advantage in negotiations and end up paying far, far less for labor. Perhaps I'm just cynical, but in my personal experience, effects like that are never accidental.

That's all 'taboo' means.

Sure. My point was mocking how it can't be the "last" conversational taboo since there are other, far more private things we don't tend to discuss in public either. Indeed, discussing salary isn't a "taboo" at all from my POV since so many people do it in public nowadays anyway.

I've had far, far more conversations that included all those other personal details than I've had that included compensation.

You've had more conversations about your sexual preferences and anatomical details than about money you've earned? Sounds fun but I suspect that puts you in the minority ;-) At least on HN where "I made $X yesterday!" type comments and posts seem to be reasonably common.

There's only one person I've dated who knew my salary, and vice versa.

I think the important question is what if you _do_ want to share that info, and other people are interested in hearing it, why aren't we talking about it?

BTW, I'm always willing to share, and the result is usually that people are eager to share with me (to varying degrees of precision, of course.) I don't have any issue with it because I never confuse my salary with my worth as a person. It's my worth to the company commingled with my ability to negotiate. When workers share salary information with each other, it smooths the last part out.

I'm not going to stop doing it until competing companies are required not to disclose the prices of their products to each other - and I see difficulties in the implementation of that:)

I wonder if it would be easier to accept the salaries of others if you knew what they were before you even joined he company.

If a particular company disclosed everything to potential employees, would those who couldn't handle the information be less inclined to join?

No. They can tell you the salaries of your future colleagues, but they cannot know how good their performance is relative to what yours will be, let alone how you will perceive that ratio.

This looks at the short term effect in one organization. The effect across the economy is something else to take into account. Market theory assumes perfect information. If you want to use market economics to maximize efficiency, then you want pay information published.

For example:

Some companies have issues finding people with certain skills.

People in other less productive companies who have those skills can use salary information to move to the more productive companies that will be able and forced to pay higher salaries.

People in other fields are encouraged to retrain into higher paying areas.

Am I a failure at a business person because my immediate (and obvious) conclusion was that if 1/2 people became miserable and other 1/2 weren't happier then the solution was to have everyone at or as close as possible to the median salary rather than being secret and under/over paying a bunch of money grubbing twerps.

I remember a blog entry that I most likely found here. It was from a company owner who makes the rules which determine how he pays employees public to everybody. It seemed pretty fair and according to him he hasn't had any complaints so far. I will keep looking for it as it was a good read, maybe somebody has it bookmarked though.

You're thinking of the Joel Spolsky / Fog Creek method of publicizing salary information amongst employees: http://www.joelonsoftware.com/articles/fog0000000038.html

There's also a sort of follow-up on why he doesn't allow for negotiation of salaries: http://www.inc.com/magazine/20090401/how-hard-could-it-be-em...

"Money doesn't always bring happiness. People with ten million dollars are no happier than people with nine million dollars." --Hobart Brown

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