Free food! Subsidies for buying hybrid cars! No lay-off policies! Paternity leaves! Employee sabbaticals! No more performance appraisals! The list of perks, benefits and organizational practices is almost endless, and as many managers know, simply benchmarking or imitating practices or benefits what some of the “great places to work” employers offer is no guarantee that these practices will work for your company. And by what will work, I mean whether or not they will lead to outcomes that will improve organizational and business performance.
In my OB class recently, one of my students brought up the potential benefits of salary transparency, a practice used by a handful of companies but is certainly not widespread. There are a few good arguments that can be made for this practice. After all, publicly traded companies issue annual reports showing the compensation of their most highly paid executives. You can easily access the average salaries of different professional groups (including professors) in public universities. In sports, we can quickly find out what the salary is of every professional player, and what their bonuses are. And, some would argue, taking the mystery and black box out of salaries might help employee morale.
In my view, here are five questions to answer before one should consider implementing a particular organizational practice in an organization. You can easily remember these questions using the acronym FEDUP.
First is Fit. How does the practice align with the organization’s strategy and culture? Zappo’s and Southwest are two companies known for having a “fun” culture. Tony Hseih, Zappos’s founder, and Herb Kelleher, former Southwest Airlines CEO, deliberately try to create an informal, almost wacky, atmosphere in their companies. One of Zappo’s core values is “to create fun and a little weirdness.” Herb Kelleher used to dress outlandishly and encouraged his employees to do the same. Now imagine implementing these “fun” practices in companies where the culture emphasizes seriousness and even frugality. Several years ago, a global company that had instituted “casual” Fridays, where employees could dress more informally one day of the week, decided to implement the practice globally. I was in Tokyo when the employees of its subsidiary received the e-mail memo. “Salary men” in Japan dress very conservatively, often in dark suits and white shirts. This is part of their identity and they take pride in being recognized as such. Dressing informally made no sense to them at all.
Second is Evidence. What is the evidence that this practice has worked? Is there a solid theory or framework behind it? Is it likely to work in different industries? Is it likely to work in different cultures? Fads are common in business, and imitating what your competitors are doing is not unusual. This is no reason to adopt the same practice in your organization. Even when there is solid research behind a practice (for example, Collins’ concept of Level 5 leadership in his book Good to Great), it does not mean that this should be applied indiscriminately.
Third is Difficulty of Implementation. What are the barriers to implementing such a practice? How difficult (and/or costly) will it be to implement? Is the timing right for your company? In Pfeffer’s classic article “Seven Practices of Successful Organizations,” he identifies one such practice as self-managed teams and decentralization of decision making as basic principles of organizational design. According to him, “organizing people into self-managed teams is a critical component of virtually all high-performance management systems.” However, the examples he gives include companies that have implemented true self-managed teams (e.g., Whole Foods) as well as companies that have implemented only certain aspects of the self-managed team concept (e.g., Ritz-Carlton). In fact, there are very few companies that have implemented true self-managed teams, while virtually all corporations today actually have some form of team concept. Why are self-managed teams not more pervasive in the work place? For one, it requires a level of maturity and autonomy among team members that may not be there. Google at one point tried to increase spans of control and remove managerial levels but decided that their work force needed managers – not so much to supervise and oversee but also to coach employees, many of whom are very technical but relatively inexperienced. Second, when a company goes through a major crisis, as Siemens did a few years ago with its bribery scandal, its new CEO implemented policies and compliance procedures that required employees to adhere to strict ethical policies. The timing for self-managed teams would not have been appropriate for this company.
Fourth are Unintended Consequences. Are there things that could go wrong with the practice that you may not have anticipated? Many years ago, Stephen Kerr wrote an article called “On The Folly of Rewarding A, While Hoping for B.” The fundamental concepts of that article are still relevant today. Creating practices that focus primarily on extrinsic rewards (e.g., bonuses, stock options, status in the organization) will tend to attract people who are extrinsically motivated. These individuals, while they may performing well in the short term to get their rewards, will not likely develop strong loyalty to their organization and will not perform good organizational citizenship behaviors. They are likely not going to be interested in behaviors that do not lead directly to these extrinsic rewards. Is this the kind of organization that you want to build?
Fifth is Purpose. Are you clear on what you are trying to achieve with this practice? And is the outcome linked to business performance? A few years ago, I was advising a company on whether it should implement Six Sigma. Senior executives had heard about its success in GE and other companies, and they believed that it might have some benefit for the organization, which had been experiencing some challenges with customer service. They were not sure that Six Sigma would work, so they decided to “pilot” it in one department. Supervisors went through training in statistical quality control, and applied some of the Six Sigma tools. There was some improvement but it did not last. For practices like Six Sigma to work, it has to start at the top, and the “philosophy” has to be embraced by senior management. By viewing Six Sigma as simply a collection of techniques that could be implemented in pieces, this practice never gained traction and was ultimately abandoned.
So should a company consider implementing salary transparency? Let’s apply the five FEDUP. First on Fit. If your company has a culture of openness, where status differences are minimized, and where gaps in salary levels are not outrageously skewed, then this might work. But I doubt that there are many companies who fit this criterion. Second on Evidence. There is surprisingly very little research that has been conducted on the impact of salary transparency, although we can certainly come up with many arguments on both the pros and cons of this. So let’s pass on the Evidence test since we just don’t have a lot of information either way. Third on Difficulty. Implementing this practice would require a tremendous investment in time on the part of executives, and extensive communication throughout the organization. Is the company prepared to do this? Is the timing right, especially when there might be some inequities that might have to be explained, or at least corrected, before taking this step. Fourth on Unintended Consequences. Will revelations of everyone’s salaries create feelings of inequity and unfairness, and is the company prepared to deal with these consequences? Fifth on Purpose. So why exactly would a company want to implement this practice? What does it hope it will accomplish? Will revealing everyone’s salaries indeed lead to higher morale and productivity? Given all this, I would submit that salary transparency is not a practice that should be implemented by many corporations today without a lot of careful thought.
Kerr, S. On the folly of rewarding A, while hoping for B. (1995). The Academy of Management Executive, 9(1), 7-14.
Pfeffer, J. Seven practices of successful organizations (1998). California Management Review, 40(2), 96-124.