When employees are aware of differences between their salaries and that of their peers and managers, it affects their productivity and job satisfaction differently.
Every organisation has a pay hierarchy that leaves room for everyone else to wonder about how much money the other person makes.
As the organisation grows, the pay differences also grow.
A 2018 research from Harvard Business Review (HBR) looked into these issues and the findings were surprising, to say the least.
The HBR experiment was conducted on a sample of 2,060 employees from all rungs of a large commercial bank in Asia.
The firm was quite representative of most companies around the world across some key dimensions, including its degree of pay inequality and non-disclosure policy around salary.
At first the researchers conducted an online survey where employees had to guess the salaries of their managers.
To make sure they had incentives to be truthful, the employees were offered rewards for accurate guesses.
The vast majority of respondents missed the mark by a significant margin.
The researchers decided that half of the respondents will learn how much their boss truly earned while the other half will not.
This was done to compare the subsequent behaviour of two similar employees when they learn about how much more money their boss makes and how it might affect their productivity.
The research estimates suggested that discovering the boss's salary to be 10 percent higher than what was originally thought caused employees to spend 1.5 percent more hours in the office, send 1.3 percent more emails, and sell 1.1 percent more.
Subsequently, the higher the surprise, the larger the effect would be.
For instance, if they learned that the boss earned 50 percent more than them, the effect would be five times larger.
The effect of learning the manager's salary was more substantial for employees who knew the numbers, knew that the managers were a few promotions away and that their shoes they could realistically aspire to fill.
Employees also became more optimistic about the salaries they were projected to earn five years in the future after learning about their managers' pay.
On the other hand, the employees' productivity and salary expectations were not affected when they learned about their subordinate's pay being several promotions away.
Furthermore, when the position of the boss was fewer than five promotions away, for each 10 percent increase in the perceived salary of the boss, employees spent 4.3 percent more hours in the office, sent 1.85 percent more emails, and sold 4.4 percent more.
Needless to say, employees handled the vertical inequality quite well.
However, they did not handle the horizontal inequality nearly as well.
The researchers moved on to asking the employees to guess the salaries of their peers - the other employees with the same position and title from the same department.
Even though employees did better at guessing the salaries of their peers than that of their managers, most employees still guessed incorrectly.
It was found that learning about other peers getting paid more has a negative effect on the employee's effort and performance.
Finding out that peers earn on average 10 percent more than initially thought caused employees to spend 9.4 percent fewer hours in the office, send 4.3 percent fewer emails, and sell 7.3 percent less.
The magnitude of transparency
The study suggested that motivating employees through raises alone is not a hundred percent effective method to lessen the inequality in salaries.
Increasing the pay of one employee would make that employee work harder but the rest of the peer group could remain unaffected.
This can be avoided by motivating employees through the prospect of a higher salary attached to a promotion.
In other words, companies should keep salaries compressed among employees in the same position, but offer them large raises when they get promoted to a higher position.
Although salary information is sensitive, there can be such a thing as too much transparency.
Most of the survey participants were in favour of increasing transparency in an anonymous fashion, by reporting average salaries by position.
However, the same employees were against the idea of increasing transparency by sharing their names and salaries.
Another follow-up study found that most employees were willing to pay significant amounts in order to hide their own salary from co-workers.
What are the odds?
The research raised the question: Should companies increase pay transparency? Although the survey revealed that most employees wished their employers to be more transparent about salaries, in reality, majority of firms maintain pay secrecy policies.
But there is little evidence on how transparency affects the outcomes that managers care about.
It is possible that managers choose pay secrecy because they think it is in their best interest when in fact it is not.
Employees in the study tended to underestimate the pay of their managers, and learning the actual amount led them to work harder.
This degree of pay transparency seemed to give employees a sense of their earning potential, driving up motivation.
But further evidence is needed to understand how to best leverage transparency to promote productivity and employee satisfaction.
When it comes to salary and pay for performance schemes, companies need to carefully consider what aspects they want to incorporate with a reward and what different ways there are to motivate and engage employees in non-monetary terms.
Most employees prefer a job in a fun environment, which is intellectually engaging and family-friendly.
Hence, it is essential to consider whether to invest in flexible working hours, or create pet projects or general fun-projects.
Fresh fruits at the desk, a new coffee machine or new screens are cheaper than rewarding all employees with money, but they will still appreciate these gestures.
However, a great number of employees are motivated by money, even though a raise mostly has a short term effect and the feeling of being underpaid continues to demotivate employees.
Yet, money cannot be the only reason to keep employees happy, motivated and satisfied.
Considering these measures, larger companies in Bangladesh can start experimenting with transparency.
The first step is to figure out what their employees want by conducting anonymous surveys and asking them relative questions like the ones the Harvard study is based on.
The survey results can act as a guide for the companies to decide which information to disclose to their employees and how.
According to the research findings, if employees can foresee promotions, it motivates them to keep giving their best performances.