What is compensation transparency?

Although recent, compensation transparency has proven effective for leaders around the world. It has become crucial for faster and better recruiting.

Post author avatar
4 minute read

How can a founder quickly build the trust and enthusiasm necessary to have an effective team of workers? There are many forms of leadership, but one important component that is gaining popularity is compensation transparency, or an open salary system that is well known and understood by everyone.

It is not without its downfalls. It is important to be as upfront with everyone, whether they are employees or contract workers. But there is increasing evidence showing compensation transparency as an important tool for recruitment and the well-being of a team.

Understanding transparency

The term “transparency” is often used to describe Industry 4.0, or the next wave of practices for innovative and fast-moving companies who respond to and redefine their markets. Transparency is used to describe the relationship between the company and its customers, building trust and brand recognition across the market.

Transparency is something that has to be built into the company from the start in order to be effective. If the team that defines the company relies on and values transparency, it becomes a basic company value. While not an explicitly stated value of Industry 4.0 and companies which operate under its vision, compensation transparency builds trust at all levels.

In order to effectively convey transparency, the leadership in every organization has to operate under it across all policies. That starts with compensation transparency and a strong belief that the team is indeed working together for the same goals and rewards.

How compensation transparency works

When selecting an appropriate compensation model for a company, the leadership has many decisions to make. One approach is to set some kind of global standard for compensation and/or benefits based on each team members' role. When this model is chosen, compensation transparency becomes a matter of telling everyone exactly what they can expect even before they become an employee or contract worker.

This is a powerful motivating tool for employees to work together. The effect was shown to be particularly pronounced among remote workers in a study conducted by Elena Glitter of Cornell University and Peter Bamberger of Tel Aviv University. In this study, participants were directed to work together as a team, with one group rewarded based on a secret formula and the other rewarded as a team based on a known system. The second group performed significantly better and worked closer together, arguing less and completing tasks quickly.

The team was simply told how they will be rewarded and no one is left out of the system. Trust and focus were greatly enhanced and the team’s performance improved. That is the essence of compensation transparency and the leadership necessary to implement it.

Still a new idea

Because compensation transparency is still a relatively new concept, much of the work defining its effectiveness is based on criticisms of standard policies of salary secrecy.

The policies of a transparent system of rewarding and motivating a team have become a topic of much interest recently. As interest increases, several small examples have shown great promise.

Potential problems

Like many new ideas, compensation transparency is not without its detractors or concerns. Most of these involve existing companies making the transition to an open model from a previously non-transparent one based on individual performance and negotiation.

For example, workers with different skill sets can suddenly discover that they are paid considerably less than those with other job titles and experience. This has been shown to erode trust that was built up in a team that had been working together for a long time. In one example, workers at the University of California system were told what all of their colleagues were making. The result was chaos and anger.

For this reason, compensation transparency is at its most effective when it is built into the team from the very start. It has also been found in the same studies to be the most effective when the categories of pay are limited, which is to say that the salary structure is relatively flat. This makes it much harder to implement over a broad range of job descriptions with different skills.

Delivering compensation transparency

Once an appropriate compensation model is selected for a start-up company, the decision as to whether or not transparency is going to be a part of the policy has to be made. If a global standard model is used, with or without local considerations, it is worth taking some time to evaluate how compensation will be communicated with employees and how transparent the system should be to promote teamwork.

If the team being assembled has a limited number of different roles, compensation transparency can be an effective tool for immediately building trust across a new team, particularly if they work remotely. It also makes management simpler and lets everyone know what skills are most valuable to the company, if they are interested in pursuing addition personal development.

How can new companies quickly build their teams to meet their goals and deliver? One method is compensation transparency or the understanding that everyone on the team is a co-equal. It is an important tool that is worth considering when defining how workers are going to be paid, regardless of location and skill.

More from Remoter