Income Equality

Do You Really Want to Know What Your Colleagues Earn?

WORKING GIRLS, Paul Lukas, Judith Wood, 1931
What! You get how much? Curiosity might not kill your colleagues but it could make them pretty mad. Source: Picture alliance

As a wise manager once said, asking how much people earn is a bit like asking how many times other couples have sex. It’s not going to do anyone any good to know the truth.

Yet that query – the one about other people’s salaries – is what will be going through many German workers’ minds come January 6 next year, when new federal rules about income transparency come into effect.

The new laws, which give employees the legal right to ask for information on how much certain colleagues are earning, were championed by Germany’s former minister for family affairs, Manuela Schwesig. Mostly they are aimed at lowering income inequality between the sexes; in Germany women tend to earn anywhere between 7 and 21 percent less than their male colleagues.

“I am convinced that this new law will bring about a change in culture, both in business and society,” Ms. Schwesig said. “And that the taboo, that says one should never speak about money, will be broken.”

Unfortunately for Ms. Schwesig, the new rules have already been roundly criticized.

The efficacy of income transparency as a weapon in the workplace battle of the sexes remains unproven.

The new rules are extremely targeted, applying only in quite specific circumstances. Nobody is simply going to be able to find out about the hidden delights of their neighbor’s pay packet (see the picture gallery below for more).

What the new rules could do though is make it easier to prove discrimination in the workplace. But any wronged employee will still have to take their employer to court, an unappetizing idea at the best of times.

Additionally, the efficacy of income transparency as a weapon in the workplace battle of the sexes remains unproven. For example, Norway, Sweden and Finland have been publishing everyone’s tax returns for decades – it’s part of the culture there – and they still have gender pay gaps, all hovering around the EU average of about 16 percent.

So it’s hard to know what kind of an impact Germany’s new rules will have.

But there is one possible way they’ve been useful already: People have been thinking and talking about the issue. Germans are notoriously private about personal data and that includes salaries. A 2015 survey commissioned by the popular workplace review website, GlassDoor.de, found that employed adults in Germany were the least enthusiastic about salary transparency out of the eight nationalities questioned. So at least these new rules are making Germans ask whether a little more transparency could be a good thing.

But is it? A jury of experts, economists and labor market researchers is still out on that one.

There are various ways in which income transparency can be positive. Secrecy about salary levels creates uncertainty and the same GlassDoor survey found that almost 70 percent of employed adults want a better idea of what fair pay is, in their own sectors.

More transparency can make it easier to negotiate with management – something that’s particularly pertinent for female or older staff, who tend to negotiate less.

The bosses at Whole Foods in the US, where they have an open database of all staff salaries, believe transparency prevents nepotism and favoritism, as well as encouraging team spirit and empowering staff.

Income transparency also makes it harder for anyone to take advantage of uninformed employees; transparency may also prevent salary excesses.

And from a managerial point of view, if people do get angry or upset about earning less than a colleague, that could be good for labor market mobility – those disgruntled individuals may be better off looking for a new job to which they are better suited.

So those are the positives. However, as experts who study behavioral economics have found, there are also some fairly serious downsides.

When salaries are revealed you often end up with winners and losers, says Mark Fallak, head of communications at the IZA Institute of Labor Economics in Bonn. He means that if one person is being paid more than the other, one feels like a winner, the other like a loser.

“The latest research shows that the winner doesn’t raise their productivity as a result,” he explains. “And the loser tends to reduce effort as a result. So the negative effects more than outweigh any positive effects.”

04 p16 Manager’s Salary-01

As an example, in one study at the University of California in 2012, teaching staff who found out they were paid less expressed less job satisfaction and more intention to quit. As for those staff who found out they were being paid more, it didn’t affect their attitudes.

Another 2012 experiment on piece workers – where somebody is paid per piece they finish as opposed to per hour – came to similar conclusions. Some of the employees were paid more per piece, others less. The lower-paid piece workers, who found out they were getting less, no longer put in as much effort. Meanwhile the output of higher-paid piece workers, who knew they were getting more money, didn’t change.

Revelations like that only help to motivate staff if the boss can explain exactly why. “When an acceptable reason for differential pay is provided, no adverse consequences are found,” writes Anat Bracha, an economist at the Federal Reserve Bank of Boston, and one of the researchers in the study on piece workers.

But, as Mr. Fallak points out, that can be extremely difficult. “People are paid differently for so many reasons, that in practice, it is almost impossible,” he argues. It could be the annual budget, the scarcity of experts in a certain field at a certain time, fluctuations in a sector or the negotiating skills of the employee, alongside dozens of other reasons like location, hours and bonuses as well as completely unquantifiable factors.

Additionally it’s highly subjective: “Everybody thinks they are underpaid,” Mr. Fallak notes wryly. Basically, as Todd Zenger, a US professor of strategy, has written: “Pay transparency is a double-edged sword, capable of doing as much – or more – damage as good.”

Whether good or bad though, we are likely to see a lot more of it in the near future, and not just because the German government legislates for it.

“It’s becoming more accepted and seen as a vital tool for businesses to retain the best millennial talent,” says Mark Di-Toro, GlassDoor’s careers expert. “These workers are accustomed to sharing every single detail of their lives online. It’s the new norm.” And that openness won’t be an option, Mr. Di-Toro says, but a necessity. “Employers face a major issue of potentially losing the very best talent when there is less transparency around pay levels,” he warns.

As it is, digital sources are already making a difference. Thanks to German and international company-rating websites – such as GlassDoor, Lohnspiegel.de, Kununu.de, Salary.com and Gehalt.de – it’s already possible to get a lot more information about pay.

GlassDoor found that almost three-quarters of the over 8,000 employees they surveyed think income transparency is a good thing, with 62 percent saying they would be willing to share salary details if they could do so anonymously. And despite the aforementiond cultural reticence to discuss pay grades, “more job seekers in Germany come to our site for salary information than in any of our other key markets,” Mr. Di-Toro notes.

Attitudes like that lead Mr. Fallak to believe that as competition to attract highly skilled workers increases in the future, some companies will increasingly use income transparency as a way of branding themselves the “good guys,” he explains.

So, one thing is certain: Whether we like it or not, income transparency is on its way, next January and beyond. But whether human beings – working their way through office politics and all sorts of odd, collegial emotions – will ever benefit from the answers to all those income-related questions or not, nobody really knows.

Cathrin Schaer is an editor at Handelsblatt Global.

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