Zeroization

The Chief Happiness Officer has an excellent post making a case for salaries being made public knowledge. It’s one of the most insightful things I’ve read on the topic. The post suggests there are three reason why secret salaries are a bad idea: it makes compensation unfair, it frustrates any debate about the topic (as it is secret,) and its a poorly kept secret. In the realm of economics we’d call this an information asymmetry – and where there is an information asymmetry, there cannot be an efficient market.

This leads to a number of problems that can affect both employer and employee. One of the dynamics at work is that without a ready and open source of information about salaries, people need to rely on job market to find out what their worth. In other words, employees who are underpaid must often put themselves up for auction to determine their worth. Once this information is available, employees can put it to use in one of two ways – they can use an offer from a competing firm as a bargaining chip or they can accept the better offer. The employer is thus put in the position of either participating in the auction, and countering the competing firms offer or choosing not to participate (and the employee leaves the firm.) I do not have empirical data to back this up (salaries being secret and all) but I hypothesize that in most cases, it is likely cheaper to participate in the auction – i.e. paying the employee more is cheaper than seeking a new candidate.

Another issue which the article hints at is the question of what the company values in employees. This is not always readily observable byt other employees. Valued employee gerally have objectively measurable qualities (sales performance, customer satisfaction, etc.) but they also have subjective qualities that the firm may value as well. If all discussion of is forbidden, then employees have no means of determining what the firm truly values in an employee. This extends to both the star performer and the marginal employee – the marginal employee does not have the information necessary to increase his value to the firm and the star performer does not necessarily know just how much he is valued relative to other employees.

Theoretically speaking, an open and fair compensation plan would incent marginal performers without over-rewarding star performers. The issue of workaholism would be eliminated in many firms. Only in poorly run organizations is the chronic workaholic rewarded for maintaining the perception of being more hard-working and dedicated than the 9-5 employee. A properly managed firm has no need, and indeed no use for rewarding non-productive behaviors.