The effect of horizontal pay transparency on employee motivation when pay dispersion is performance based and non-performance based

Summary

Grasser and Newman's (2024) research examines the intricate relationship between horizontal pay transparency and employee motivation within organizations where both performance-based and non-performance-based pay dispersion exist. The study acknowledges the growing trend toward pay transparency and aims to understand its impact in a comprehensive information environment where employees also possess relative performance information. Drawing on distributive justice theory, the authors hypothesize that the effect of pay transparency on motivation is not uniform but rather depends on what the transparency reveals about an employee's relative standing in terms of pay and performance. The methodology likely involved an experimental design, as suggested by mentions of "experimental evidence" in related works and the structure typical of accounting research papers investigating behavioral aspects. The core of their investigation lies in how employees process information about their peers' pay, especially when they can also assess their own performance relative to others. The researchers predicted and subsequently found that pay transparency differentially affects employees' motivation based on whether they perceive their relative pay to be aligned, misaligned (underpaid), or misaligned (overpaid) with their relative performance while working under similar performance incentives. The key findings highlight that when pay transparency reveals employees are underpaid relative to their performance, their perceived distributive fairness decreases, leading to a significant negative impact on their motivation. This effect holds true even when other financial and social incentives might typically encourage effort. Conversely, if pay transparency reveals employees are overpaid, their motivation does not significantly differ compared to a scenario of pay secrecy. The study underscores the critical importance of considering an employee's broader informational context and their subjective interpretation of pay fairness when implementing pay transparency initiatives. The implications suggest that firms considering horizontal pay transparency must carefully manage the information environment and ensure that pay disparities are clearly justifiable by performance to avoid detrimental effects on employee motivation.