Compensation And Benefits -
10 Years of Data on Baseball Teams Shows When Pay Transparency Backfires - Sun and Planets Spirituality AYINRIN
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Because our perceptions about pay are often wrong, pay transparency within organizations has started to gain popularity. But there are pros and cons to this approach: On one hand, transparency can guard against discriminating while giving people a firm grasp of where they stand. On the other, when people are made aware of pay dispersion, it can lead to feelings of inequity that affect satisfaction and motivation. Research using data from Major League Baseball teams shows that transparent pay can, in fact, lead to higher team performance — but only when individual performance is justified by pay as well. The lesson for companies is that, rather than hiding pay information or making it accessible without context, they would be better off forming transparent performance metrics, matching pay to those metrics, and having open conversations with employees about where they stack up.
You’ve probably taken a guess as to how much money your coworkers and others make, compared with you. Evidence suggests you probably aren’t very accurate. In one PayScale survey of 71,000 people, for example, 64% of those paid the average market rate thought they were paid less than average. At the same time, 35% who were paid above market rates also thought they were paid less than average.
Because
our perceptions about pay are often wrong, pay transparency has started
to gain popularity. Why not simply inform workers of what everyone in
the organization makes, in order to stave off speculation?
There
are pros and cons to this line of thinking. On one hand, such a policy
can guard against discriminating along racial, ethnic, or gender lines
while giving people a firm grasp of where they stand in an organization.
On the other, firms naturally have differences in pay in some form.
When people are made aware of pay inequality (or “dispersion”), it can
lead to feelings of inequity that affect satisfaction and motivation,
increasing the likelihood that people will quit. Because of this, some question the wisdom of openly informing people that pay differences do exist. We agree with both arguments. Pay transparency can be
a good thing, but it can also be a bad thing if executed poorly. So how
does a firm correctly execute a pay transparency plan? By making sure
the inherent differences in pay are justified by differences in workers’
performance on the job. Our research,
appearing in Strategic Management Journal, shows that if people know
how much they make relative to others, and if differences in pay can be
clearly tied to how their performance stacks up against coworkers’,
harmful effects of differences in compensation can be negated. Pay
transparency must go hand-in-hand with performance transparency —
something that may seem obvious but, at least in our experience, is
lacking in most organizations. To
analyze this, we used data from an industry where individuals’ pay and
performance are quite transparent across firms and also, at least for
some, are quite unequal: Major League Baseball. We tested how
differences in pay and in players’ performance affected the winning
percentages of MLB teams from 1990 to 2000, controlling for a host of
factors including how much teams spend on players’ salaries, relative to other teams; the ability of the manager; and the overall team talent, which we measured using a comprehensive and comparative player performance metric
created by noted baseball statistician Bill James. (While sports
are different from other industries in many respects, baseball makes a
good test case for this kind of study for several reasons. First,
there’s lots of transparency about individual performance and
compensation. Second, the format of the game makes it possible to
separate, to a higher degree than in other contexts, individual
performance from team performance. And third, MLB players’ compensation
is less regulated than in other sports, so we can more readily observe
the impact of pay dispersion.) We first show that, as in prior studies,
pay dispersion is negatively related to winning performance above and
beyond the effects of the other factors. In other words, the greater the
inequality in pay, the worse the performance. But
when we looked more closely at performance, we found that teams
actually perform better (that is, they have a higher winning percentage)
when there is a match
between pay and performance. In essence, a team could have a high
dispersion in pay between players, but if the pay corresponds with their
performance, the negative aspects of inequality go away, at least in
the form of a team’s winning percentage.
Consider
the Oakland A’s as an example. In the late 1980s and early 1990s, they
were one of the top-spending and most successful teams, playing in three
straight World Series, from 1988 to 1990, and winning nearly 60% of
their games in 1992. New owners took over in 1995 and changed
strategies, slashing payroll and shifting their emphasis to using
younger, cheaper players (as opposed to a roster of expensive veterans),
while also focusing their smaller payroll on rewarding a handful of key
performers. This approach, famously described in Michael Lewis’s book Moneyball,
took time, as the team cycled out existing contracts, so that by 1997
the A’s had a very low match between pay and individual performance. But
then things began to change: The match improved to about league average
in 1998, and increased further in 1999. Most important, the winning
percentage of the A’s improved along with the improved match in pay and
individual performance; the team went from winning 40% of games in 1997, to 46% in 1998, to 54% in 1999. In 2000 they won 57% of their games and were back in the playoffs, with a high match between their dispersion in pay and players’ performance. There
are also examples of pay and performance mismatches, either by having
highly dispersed pay or highly similar pay (low dispersion) that is not
justified by performance. In 1998, just a year after winning the World Series,
ownership of the Florida Marlins (now named the Miami Marlins) engaged
in a fire sale, cutting the payroll to one-quarter of its previous
total. As with the A’s, certain players and contracts were hard to
trade, and the result was that the Marlins had a highly dispersed
payroll — the highest in the league, in fact. That same year, the
Montreal Expos (now the Washington Nationals), which had been cutting payroll for the previous few years,
had a roster full of inexpensive players all paid relatively the same,
resulting in the lowest pay dispersion in the league. Yet for both
teams, dispersion in individual performance was about average, creating
high mismatches for the two teams but in different ways: high dispersion
in pay with average dispersion in individual performance for the
Marlins, versus low dispersion in pay with average dispersion in
individual performance for the Expos. Unsurprisingly, the Marlins won only one-third of their games, while the Expos won 40%. In
the end, our analysis points to two general conclusions. First, the
negative impact of high pay dispersion is not about equality but about equity.
Or, more specifically, group performance suffers when pay differences
or similarities are not justified by individuals’ performance.
Relatively high or low dispersion is not in and of itself bad; rather,
it is the match (Yankees/Braves) and mismatch (Marlins/Expos) between
pay and individual performance that creates problems.
While
there are some limitations to the generalizability of our research,
including the head-to-head nature of competition in baseball and the
openness of pay and performance data, we suspect similar dynamics may be
at play in the workplace. Sports data is useful for studying pay and
performance since it is widely available, but studies identifying
problems associated with pay dispersion appear in diverse contexts,
ranging from hospitals to trucking firms and concrete pipe manufacturers, and from administrative professionals to executives in S&P 500 firms. As
such, it is imperative that pay be allocated based on equity, where pay
matches performance. If not, firms that pay more or have better overall
talent may not perform as well as expected, if high performers are paid
the same or less than their lower-performing peers. Similarly, firms
with employees who perform similar tasks, and to a similar degree of
quality, should all be paid similarly to eliminate any harmful effects
of pay dispersion. If not, high performers may lack motivation to
continue to outperform their peers who do less but make the same, and
low performers may lack motivation to perform better when they can make
the same as high performers by doing less work.
Our
second conclusion is that it’s important to understand pay transparency
as a complex issue. As calls for pay transparency increase, it’s
important for companies to understand when it may and may not pay off.
Sure, it can be a tool for broader pay equity and for employee
motivation. But if pay is transparent and performance does not justify
any discrepancies or similarities, pay transparency can have disastrous
effects.
Consider
the infamous case of Seattle credit card processer Gravity Payments,
which, in 2015, set a minimum salary of $70,000 for all employees. Two
employees interviewed by the New York Times ultimately
quit. One was frustrated with “people who were just clocking in and
clocking out” earning the same as he was. Another was upset by the lack
of fairness, noting the company “gave raises to people who have the
least skills and are the least equipped to do the job, and the ones who
were taking on the most didn’t get much of a bump.”
The
bottom line for companies is that people are going to make comparisons
about pay and, more often than not, will make them inaccurately. Rather
than hiding pay information or making it accessible without context,
organizations would be better off forming transparent performance
metrics, matching pay to those metrics, and having open conversations
with employees about where they stack up. That, more than anything, is
what a truly transparent compensation program would look like.
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