Why Companies Keep Pay a Secret, and Why You'd Rather Know The Truth

“A new study by researchers at the University of California at Berkeley and Princeton University suggests that if all of our salaries were made known tomorrow, half of us would be made miserable and the other half would be made no happier.”
-Smart Money Magazine, “Why Companies Keep Pay a Secret“

The implication is that we’re all better off not knowing the truth.

This, however, is only the employer’s half of the story. This information is indeed of negative value to the organization…but it is of positive value to the workers.

Information, in a free market, causes prices to equalize. However, salaries within an organization are not a free market. The only way to meaningfully increase your salary is by leaving and taking another job, and the only way to meaningfully decrease your salary is by getting fired or laid off.

So there is a free(ish) market in the larger sense of the employment market as a whole, and employees participate in this larger market—while employers would rather restrain them from doing so by withholding information, forcing them to sign non-compete agreements, and so on.

Employers benefit from keeping pay a secret because they can pay some of their employees less than their market value and redirect that profit to themselves. An underpaid employee may quit and get a new job at a better salary, which is indeed a disadvantage to their old employer…but it is an obvious advantage to the employee, who will be much happier at an employer who is not trying to cheat them out of earning their full market value.

In other words, this article is correct in its data, but wrong in its conclusions.

If you’re not convinced, here’s an analogy:

The article might as well argue that there should be no price tags in supermarkets, that we should each negotiate a price for hamburger with the store the first time we walk in, that we should pay that price (indexed to inflation) for the rest of our lives when shopping with that store—and that none of us should ever be able to find out what anyone else is paying for hamburger.

It should be obvious that such an arrangement benefits the store (who can charge some of their shoppers well over market price) but disadvantages the consumer.

It should also be obvious that while a shopper might be initially dismayed to find out that they were paying substantially more than another shopper under such a system, they would be much happier in the long run to know who was paying what, and to use that information to be able to pay a lower price for hamburger instead of continually wondering whether they were being cheated.

But, of course, the article and study only account for the immediate, short-term effect on the employer.