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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
On average, women are paid less than men. And I’ll let you into a secret of the sisterhood: they don’t like it. Policymakers around the world have seized on a supposedly simple solution, which is to make pay more transparent. If only the evidence were more straightforward.
Policies that illuminate pay sit on a spectrum. At one end, some American states protect the right of workers to discuss pay among themselves. At the other, Sweden, Finland and Norway make everyone’s earnings accessible to the public. (This adds a certain spice to reality television shows, where one can rank the incomes of prospective couples.)
Employers in the EU are bracing themselves for a major reform falling somewhere in the middle. By 2026 employees will have the right to hear “objective” criteria for pay and progression, as well as what others doing work “of equal value” earn. And anyone wanting to hire will have to share salary bands with jobseekers.
All this will probably sound good to anyone who has ever felt gaslit by an employer. Putting salary bands on job adverts can save time. Formalised pay-setting practices should leave less room for implicit bias. But a recently published study by Zoë Cullen of Harvard Business School suggests that this mixed bag of efforts will have similarly mixed effects.
Start with the good news. People tend to underestimate what their bosses earn, and enlightening them can be motivating. A study of a south-east Asian bank found, for example, that when workers discovered their bosses earned 10 per cent more than they previously thought, their sales revenue rose by 1 per cent. Less enjoyably for their colleagues, they also sent 1 per cent more emails.
The evidence on transparency in job adverts is promising too. In several cases it seems to have raised pay overall, presumably by helping underpaid workers find better opportunities, and by pressuring employers to work harder to keep their staff. After a reform in Slovakia, one study found that people applied to a broader range of jobs. Awkwardly, though, the gender pay gap didn’t budge.
Policies that shine a light on gender pay gaps between employees are trickiest. Where workers are unionised, transparency policies don’t seem to have much of an effect. Where individuals bargain, the evidence gathered by Cullen suggests that being open about salaries does work in one sense. One study of a British reform in 2018 found that companies facing new disclosure requirements closed about a fifth of the average gender pay gap.
The problem is that the squashed gap came not by raising women’s pay, but by curbing that of men. Transparency seems to have a “back stiffening” effect, handing employers power to push back in negotiations. (“I’d love to give you a raise bro, but I can’t because there isn’t the budget to give one to the ladies too.”)
Other risks include that the men experiencing soggier pay growth reduce their effort. (“Sure bro, I’ll just take a little longer to respond to all those emails I’m being sent.”) Anyone else who now understands that they’re being paid less than their peers will be irritated too. (“Please, please stop calling each other bro.”)
A study of a Danish reform increasing transparency shows this isn’t hypothetical. It found that affected firms suffered from lower productivity, enough to offset the boost to profits of a lower wage bill.
Some other unintended consequences might be tricky to pick up in the research done so far. Companies could avoid being shamed by outsourcing low-paid jobs. Or they could get creative with compensation. (Generous parental leave, doughnuts or an NFT of the corporate logo? . . . bro?)
Now, pay can be based on a mix of vibes, outside offers and the hassle of replacing someone. But as companies increasingly have to justify their pay gaps, it seems likely that more will move towards formalised, rigid pay structures. Anthony Poole of McLagan, a consultant, notes that some companies will find the required categorisation of employees uncomfortable. “Some of this stuff is really tugging at the DNA of how an organisation thinks about career, about progression, about pay,” he says.
In the short term, more formalisation probably means headaches for managers. They will have to work out how to measure achievements objectively, an impossible task in some white-collar settings. They will have to have tough conversations with disgruntled staff, who may not be the best judges of their own performance.
Count me in on the war against gender bias. But some battles are bloodier than others.