Behavioral Economics for Leaders

CHAPTER 14Unintended Negative Consequences of Salary Transparency

While in Scandinavia practically every citizen can view the tax returns of their neighbor and thus their income, in most countries of the world income is one of the most closely guarded secrets. Public discussion on whether salaries ought to be disclosed flare up at regular intervals. What's not discussed in this context are the wanted and unwanted side effects that such pay transparency might have.

A few years ago, the so‐called Pay Transparency Act came into force in Germany with lots of concomitant media attention. The law requires companies with a certain number of employees on board to disclose upon request the criteria for salary classifications and provide information on how high the average salaries are in a particular position. When the law was adopted, it was hoped the law would help close the pay gap between men and women. At present it is still too early for a final assessment as to whether the law has helped in any way to achieve this goal. That data is not available yet. It's worthwhile, though, to take a closer look at the effects and side effects of more salary transparency in order to augment the political discussion—which is often partisan and can be dogmatic—by adding facts.

Analyzing the effects and side effects of salary transparency isn't an easy task. It requires that a situation with salary transparency can be compared to a situation without such transparency and that the two situations ...