Transcript: Does pay transparency work? With Zoe Cullen and Pilita Clark

This is an audio transcript of the Economics Show with Soumaya Keynes podcast episode: ‘Does pay transparency work?’

Soumaya Keynes
Do you want to know how much your colleagues are paid? Do you want to know how much your boss is paid? I suspect the answer to both of those questions is yes. Well, governments around the world are trying to help you out and make pay more transparent. But transparent pay doesn’t always mean more pay.

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This is the Economics Show with Soumaya Keynes. In this episode, I will be talking to Zoe Cullen, an assistant professor at Harvard Business School and leading expert on pay transparency. I’ll also be chatting to my colleague Pilita Clark, fellow columnist here at the FT. Pilita, hello. 

Pilita Clark
Hello, Soumaya. 

Soumaya Keynes
OK, on a scale of one to “this is the best thing ever to have happened to me in my entire life”, where are you on pay transparency.

Pilita Clark
All right, so if the best thing ever is a number 10, I would probably put myself at around two, because when I think of pay transparency, I often think that that means that anybody can find out what I earn and I can find out what anybody else earned. And frankly, although there are a lot of really good reasons why it would be a good thing if this were to happen, because it could help, for example, to close the gender pay gap, to be honest, in my heart of hearts, I really don’t like the idea of having to divulge my pay packet.

Soumaya Keynes
Yeah, I suppose I agree it would be a bit strange to live somewhere like Sweden or Finland or Norway, where you can just see what people earn. I think in Norway you can just search for people’s taxable earnings online, although the person you search does get told that you’ve looked, which is a bit awkward. But then I do wonder if it was just the normal thing. Wouldn’t I get used to it?

Pilita Clark
Look, it’s possible that in a country where this was incredibly normal, I would get used to it. And I can see there are incredible benefits from it, beyond just the idea of being able to close the gender pay gap. For example, tax agencies would be presumably helped a lot if it was easy for everybody to see everyone else’s wages. And for example, if I was living next to someone and I saw that they were only earning something like NKr10, which is not very much money, and they had just parked a brand new Porsche in the drive, then I could potentially say that something was up.

Soumaya Keynes
Yeah, OK. I love this image of Pilita, the kind of tax snitch on her neighbours. I might question how many people are going to do that in practice. And I suppose there’s just the general broader point, which is that it could just be quite awkward if people find out that their best buddy is actually owning the megabucks. And that’s kind of a weird inequality that makes social things a bit awkward.

Pilita Clark
Yeah. And for the sake of clarity, I do want to make it clear I wouldn’t be the sort of person who is going to go around snitching on neighbours necessarily. 

Soumaya Keynes
You should. It’s good, it’s good. Gets tax revenue, I love it.

Pilita Clark
And it might be that my neighbour liked to give me a lift in their lovely Porsche when I needed to get to the train station in a hurry. There’s all sorts of reasons I might not want to snitch on them, but nonetheless, I think it could be awkward. But let’s face it, if it was happening everywhere, if it became the norm, we might get used to it.

Soumaya Keynes
OK, I should bring in perhaps a study of Norway where researchers looked at how people felt when it became much easier to search for other people’s income online. And it does look like the extra information on pay made higher paid people feel better. They were like, “Wohoo, we’re very rich”, but it made lower paid people feel worse. So that’s not great. We don’t want something that makes people feel sad.

Pilita Clark
Yeah, and it’s interesting really. It reminds me a little bit of a sort of a transparency argument that sometimes is used in climate change, where there is an argument that if you just get companies to disclose their emissions footprint, then there will automatically be some form of action and there will be a reaction and will actually have progress. And there’ll be measurable change. In fact, just by having disclosure, it doesn’t necessarily mean that they do anything. And I see a bit of a parallel here because just because you know how much somebody is being paid doesn’t necessarily mean there’s going to be any action to change the inequity.

Soumaya Keynes
Yeah. I suppose the question is why do we have unequal pay. Is it that people simply don’t realise that they should be negotiating harder? Or is it that they actually don’t have the power to negotiate harder? You could end up just giving people information and they say, yeah, we’re really annoyed still and we can’t do anything about it. That isn’t ideal. Right?

Pilita Clark
Exactly, exactly.

Soumaya Keynes
OK. Well, look, let’s pause here because we have been talking about a pretty extreme version of pay transparency, which is where everyone knows how much everyone else is paid. But when thinking about policy today, that’s really not actually where most people are going. Mostly the policy changes that are happening are much lighter touch. So you wouldn’t get everyone’s pay, but you would get more information about pay of similar people or people near to you and how that pay is set.

Pilita Clark
Yeah, and it’s really interesting. And I know that you’ve spoken to Zoe Cullen, who we’re going to hear from in a moment, a professor at Harvard Business School who specialises in pay transparency and has actually split all of these many different forms of pay transparency into three categories: horizontal pay transparency, vertical and cross-firm.

Soumaya Keynes
Yes. OK. Well let’s start with horizontal pay transparency. So that is where essentially you’re getting more information about your pay relative to those of your colleagues. Right? So vaguely similar people to you. So that might actually mean publishing the gender pay gap within your firm. Or it could mean being able to go to a boss and saying, hey, I want to know what people similar to me are being paid.

Pilita Clark
Yes. And so here in the UK, for example, we’ve had nearly seven years of a law, a rule that basically says for big companies have to publish their gender pay gap. And I think it’s been really quite interesting because people expected that that was going to lead to a narrowing of the actual gender pay gap. And what’s actually happened is that the gender pay gap has continued to narrow, as it was doing before the introduction of this rule, but not really at the pace I think that a lot of people were hoping it might.

Soumaya Keynes
Yeah, and I suppose the caveat to that is just by looking at the trends over time, it’s tough to tease out the exact impact of the pay transparency rule. OK. And there’s another caveat, which is that actually, this kind of firm-level gender pay gap often ends up combining a lot of different things, right? So it could be in theory that the gender pay gap could rise if a company hires a lot of senior men, not very many junior men, that will make the gender pay gap look bigger. But in terms of what we think of as equal pay for equal work, actually, that may not have changed at all.

Pilita Clark
That’s right. Nonetheless, this form of pay transparency is pretty common, particularly here in Europe.

Soumaya Keynes
The EU is actually going further. So they’re doing something a bit more granular. So this is going to be a big EU directive, it’s going to be mandatory across EU member states. And in the future you’re going to be able to go to your employer and say, I want to know how much people doing work of equal value to me are being paid, and they’re going to have to tell you how much men are doing work of equal value to being paid and how much women are being paid doing that same work. This is a really big deal. 

Pilita Clark
Yeah. Well, I mean, in our office, for example, that means that I could bawl into the managing editor’s office and say, “Not that I want to know how much Gideon Rachman is being paid, or Soumaya Keynes, but I could ask how much a male columnist and female columnist at my level of seniority being paid, and how does my pay compare with the average of all their pay?

Soumaya Keynes
Yeah, and this is a big deal, because in some cases, companies are not going to have a clear idea of what actually counts as equal work. And actually, there have been some controversial pay discrimination cases where the women have argued, hey, our work is of equal value to this other job that sort of sounds different, but really it’s shouldn’t be paid any less. So what you’re going to get, I think, is a quite a few disputes where people say, “Wait, hang on a minute. Our job is the same as that”. You know, with columnists, maybe it’s relatively easy, but for many employees, it’s going to be quite difficult. So it’s just quite a lot of extra process and structure that some firms may have to implement. And the worry that some have is that it’s going to move people towards quite a rigid pay structure. So closer to what you have in the civil service where you have very, very flat pay structures. It can be difficult to reward people with more pay for good performance. And that will have kind of unintended consequences, making it harder to retain superstars or even just encourage people to do good work.

Pilita Clark
You know, even if it seems as though it’s relatively easy to measure people doing similar work, what measurements are you supposed to use? Are you supposed to just look at seniority? Or, you know, if we go back to the columnist, are we supposed to be looking at page views, time spent on page, the number of subscriptions that are generated by specific columns. There’s all different ways of measuring and assessing this. So I can see that it’s going to be potentially pretty difficult and could throw up quite a few headaches in fact.

Soumaya Keynes
Yeah I mean it’s definitely very, very complicated.

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I want to know if all of this hassle was really worth it. So I asked Zoe Cullen of Harvard Business School whether these pay transparency measures actually worked to close the gender pay gap. Here is what she said.

Zoe Cullen
Yes, but. So I would say those policies are pretty effective at that objective, which they came to the table with, which is closing gender gaps.

Soumaya Keynes
With how much of the gender pay gap do they close. Did they close the whole thing or just a bit of it?

Zoe Cullen
Oppfff! Well, that’s a tricky context-specific question. I think from the data I’ve looked at, typically within position, those gaps get very close to being zero. On average, at least in the US context. You know, you’re really looking within a position title’s only 5 per cent gap between men and women. Now, when you introduce pay transparency policies, quite often the employer goes ahead and just makes the pay a more rigid schedule, so everyone will be paying the same thing. Of course, some employers don’t respond at all, so you’ll get the cases where you’re averaging across employers who really try to fix the gender pay gap and get to zero, along with some employers who don’t make changes. And on average, you’ll see people get close to, maybe halfway there. And of course, in most of the cases where employers are proactive, they’ve closed it.

Soumaya Keynes
OK. Well, even if there were some differences between firms, that still sounds pretty good. What’s the but?

Zoe Cullen
The but is how you achieve pay equality and the way you achieve it has implications for other things. In particular overall pay levels. So we started out by talking about the gap between men and women. Of course, people care about equity. Oftentimes people also just care whether they are getting paid? And an ideal outcome would have been, from the worker’s perspective, if they would ask for equal pay, that their pay would be raised to be equal to the higher earners. In fact, we find empirically employers are lowering average wages in order to achieve pay equity.

Soumaya Keynes
But to be clear, the only way that that could be consistent with the gender pay gap going down, right, is if men’s pay is constrained more than that of women. Is that right?

Zoe Cullen
High earners. So typically the high earners will be male. But it is true that there are also some high achieving women who could experience a slower wage growth in response to horizontal pay transparency laws.

Soumaya Keynes
OK. I’m just going to pause things here because this is awkward. It looks like pay transparency is reducing gender inequality, but it comes at a cost. It is making it more awkward for higher flyers, men to ask for pay rises. So imagine this: the man comes and asks for a pay rise, and the company turns around and say, well, look, we would, but we can’t because otherwise it makes our pay gap stats look bad. That is definitely not what advocates of this policy had in mind. But the other interesting thing was that it does seem like there are circumstances in which the transparency doesn’t lower average wages.

Zoe Cullen
So here’s what we’ve been able to see. We see, first off, that when pay transparency mandates come into effect, specifically workers’ rights to talk to each other, so horizontal pay transparency. In cases where a lot of workers are covered by a collective bargaining agreement, it doesn’t end up leading to lower average wages.

In some of the cases, the pay gap closes substantially, and still it doesn’t lead to lower average wages. In other cases, the pay gap doesn’t close as much. And my strong suspicion is that what’s happening is it’s you know, it comes down to what the collective preferences are of members in that union, how to both make gains and redistribute the pay.

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Soumaya Keynes
Pilita, what did you make of all of that?

Pilita Clark
OK, so for me, this was the very definition of the unintended consequences we talked about earlier, where you go to try to address the gender pay gap, and you bring in a measure that has a consequence that you didn’t quite expect. And I completely agree with you. I really think that advocates of closing the gender pay gap certainly don’t really advertise the idea that Zoe Cullen has shown us that’s happening here in the real world. The idea that you can close the gap by pushing down the wage growth of high flyers. And I will just say it’s not just men. I can just anecdotally, I can think of two relatively senior women who went to ask for a pay rise at their respective organisations and were told, look, I’m really sorry, we can’t do that. But, you know, really good news. We are really elevating the pay of younger women. And both of them said to me, you know, that’s great for younger women, but it really the only woman I’m caring about here is me. And so it’s not really helping me. So I think it’s probably an unintended consequence that actually occurs with men as well as women.

Soumaya Keynes
I guess my takeaway is slightly different. Yes, there is this unintended consequence. And you know, this is sort of gotcha economics at its best. But for me, the big point was that you can’t do this thing in isolation, right? If you do implement horizontal pay transparency like this, then you need to make sure that there’s some thing to offset the effects pushing down wages. Effectively, what you’re doing is you’re handing employers a lever in the kind of wage bargaining process, right. Because they say, oh, well, we can’t do this because of the pay transparency stuff. And so what you need to do is make sure employees have something of their own to push back against that so that average wages don’t fall.

OK, but look, we should move on to the second type of pay transparency, which is vertical pay transparency. Walk us through that.

Pilita Clark
Well, I mean, I think the clues in the name. It suggests that it’s about the transparency of pay of people who are more senior to you, who are higher ups. 

Soumaya Keynes
Yes. So this is the kind of thing that would make it more obvious what your boss would earn, or what you could expect to earn if you stayed at a particular company for years and years and years, giving people information about their salary trajectory, making it easy to understand how much people senior to them earn.

Pilita Clark
Yeah, I mean, it’s interesting because don’t you think that to a certain extent, people already know how much their boss earns?

Soumaya Keynes
Well it turns out no. Actually, people systematically underestimate how much their bosses earn. Zoe mentioned to me one study that she worked on at a bank that found that employees underestimated their bosses’ salaries by about 15 per cent.

Pilita Clark
That is so interesting. Did she say why people underestimate to that extent?

Soumaya Keynes
I mean, I don’t know if we have a very good answer. She did say that people in general underestimate the extent of inequality more broadly. So maybe it’s kind of wishful thinking, right? We will like to think that we’re in this very fair society where we’re quite similar. They don’t like to think that there are these huge inequalities between them and people who work quite near to them, even if they’re not doing the same job.

Pilita Clark
OK, so just to spell this out, this type of pay transparency differs from horizontal transparency because it means that companies make it clearer what different types of employees earn. So in other words, you get to have a sense of what managers earn within a certain kind of range. And that basically lets people know what sort of pay trajectory they can expect in their organisations.

Soumaya Keynes
Yeah. And you might expect that to make them make a bit more effort, right. You know, maybe the C-suite looks kind of tedious and dull. You’ve got to manage everyone else’s problems. You’re accountable when other people make mistakes. And so you think, oh, no, I’m going to have my nice life here at this sort of mid-level, and then you find out how much they’re getting paid and you realise how they’re getting that timeline and you’re like, oh, OK, yeah, I’m going to pull my socks up and work a bit harder.

Pilita Clark
OK. So I mean, I would also expect that would motivate a lot of people to work quite a bit harder because they know what sort of pay goal they can be aiming for.

Soumaya Keynes
Yeah. And there is actually a study on this, funnily enough. So this one by Zoe and a co-author of hers that finds that telling people about their manager’s pay and how much higher it is than they previously thought is associated with them generating higher sales revenue, working longer hours and also more emails sent. I’m not sure how I feel about that one.

Pilita Clark
I know exactly how I feel about that because I think we already get far too many emails. But in general, I like the idea of this motivating force coming into being with a pay transparency measure. I think it’s really interesting and something that if I were running a company I’d quite like.

Soumaya Keynes
OK, well, that is a good moment to pause because we are going to cut to a break and when we get back, we are going to talk about a third and final type of pay transparency, and one that might actually be the most effective at closing the gender pay gap.

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And we are back from the break. So the third type: cross-firm pay transparency. Got such a zing to it.

Pilita Clark
Do you think zing’s the right word there, or do you think that we are mildly obsessing about this sort of stuff?

Soumaya Keynes
We’re great. I have no . . . I make no apologies.

Pilita Clark
OK, so cross-firm pay transparency. Again, I guess, the clue is kind of in the name. It means that you get a sense of what a lot of different firms are offering. This is something that I have written about actually, and I think it is super interesting. In fact, we’ve started to see it spreading in a number of places in the US and elsewhere. New York, for example, was one of those places. It decided that when an employer advertised for new employees, it had to put the salary band on the job ad.

Soumaya Keynes
Yes, I remember that too. And there was a lot of fuss because some people felt ridiculous, salary bands and, you know, $5 to $2mn or something. There were some examples of companies that weren’t taking it entirely seriously, but actually, I do think that those were fairly isolated. And actually most employers have been doing that.

I want to add here that that is also part of the EU directive that’s coming in. So it’s going to be mandatory for employees in the EU to share the starting salary or the pay range of an advertised position, maybe not in the vacancy notice, but at least ahead of the interview. So the EU is also jumping on the bandwagon.

Pilita Clark
Yeah, and it’s not without problems because, for example, one could be scanning the help wanted ads from one’s desk at a company and discovering that job that was very similar to yours was being advertised for more money than you were being paid. So not exactly without problems.

Soumaya Keynes
Well, hang on, you say that’s a problem? That’s the point, right? You’re supposed to, you know, see what they’re earning somewhere else, and then go to your boss and say, hey, I want that too, right? That’s you know, I think one of the ways that it’s meant to reduce the gender pay gap, to give women more transparency of what competitors are paying. You know, I think there’s also some benefits to employers. I spoke to Felix Mitchell, who runs a recruitment firm. He was saying that it can save time for employers. There’s nothing worse than advertising for a position, seeing an amazing candidate that they only later realise that they can’t afford. And so they’ve got their expectations raised. And then everyone else just seems a bit disappointing relative to that.

Pilita Clark
And correspondingly, for employees, it also makes it much clearer which firms they really should be trying to work for and which they should be trying to avoid. So it should theoretically make the labour market work more efficiently.

Soumaya Keynes
Yeah, totally. And actually there have been studies on this. There was an example in Slovakia where they mandated that pay bands be included on job ads, and they found that overall, it encouraged people to apply to a broader range of jobs. People understood, oh, that pays a pretty penny. But also it actually increased average pay overall by about 3 per cent. And it seems to have had the kind of equal and opposite effect of the horizontal pay transparency that we were talking about earlier, and that reduced pay by around 3 per cent. And this seems to have increased it.

Pilita Clark
And just looking at the gender pay gap specifically, it’s interesting because there are studies showing that in general, women ask for less pay than men. But when women know what the median salary offer is for similar candidates, the gender pay gap closes.

Soumaya Keynes
Yeah, that’s pretty hopeful, right? Maybe women benefit more from this extra information because left to their own devices, they’ll kind of undersell themselves.

Pilita Clark
So this so-called cross-firm pay transparency idea, you know, I can see why people are drawn to it because clearly it has some great benefits. And, it’s been shown in studies why those benefits probably help to close the gender pay gap. So it probably works quite well and perhaps better than the horizontal pay transparency measures that we talked about at the beginning.

Soumaya Keynes
Yeah, I think if I were to rank them, I would put at the top of my list the cross-firm pay transparency. It looks like you’re just giving workers more information that they can then use to bargain with their employers. And it looks like there’s some kind of suggestive good effects on the gender pay gap as well. I think second on my list would be vertical pay transparency. And, you know, I think it was a positive surprise to me that people were kind of positively motivated by finding out what their managers and they weren’t kind of furious about the inequality, actually. It was a kind of positive thing for their productivity. I’m actually also a bit confused as to why more firms don’t just do that. But there we go. And then I think bottom of my list, annoyingly, is horizontal pay transparency. Not that it shouldn’t be done, it just seems to be the most complicated one to implement. You kind of need the most safeguards to avoid these unexpected effects of overall pay going down. Pilita, does that match your ranking?

Pilita Clark
It basically does. I think I might just slightly upgrade my original two out of 10 for pay transparency overall, and move it up quite substantially, actually in agreement with you really on the point about vertical transparency and cross-firm transparency in particular, because it’s very easy to see the benefits there. I think I’m still going to give the Norwegian you can see exactly what every individual is being paid and that sort of transparency. I think I’ll still rank pretty low. But I guess, you know, basically when I think about this, in an ideal world, it would be great if we didn’t need to take any of these measures and we didn’t need to be transparent, because everybody was paid fairly and equally for equal roles and equal work. But I guess, unfortunately, we’re just not quite there yet.

Soumaya Keynes
Oh, if only. OK, well, look, I think that is a good note to end things on. So that is all for this week. Thank you so much for joining me.

Pilita Clark
Thanks so much, Soumaya. 

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Soumaya Keynes
Huge thanks to Zoe Cullen of Harvard Business School. This episode was produced by Edith Rousselot, with original music from Breen Turner. It is edited by Brian Urstadt. Our executive producer is Manuel Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Soumaya Keynes. Thanks for listening.