Breaking the silence on corporate pay secrecy

Doing one simple thing can help organisations boost innovation, power up productivity and increase diversity.

More than half a century has passed since Australian women earned the right to equal pay for equal work in 1969.

Yet despite some great strides towards workplace equality over the past 5 decades, in 2023 the Australian gender pay gap is still 23 per cent. In financial terms, that means for every dollar a man is paid, women earn an average of 77.2 cents.

It’s a bleak outlook. And it’s made gloomier still by International Labour Organisation predictions that it will take another 70 years to close the gap.

New research by Monash Business School senior lecturer Dr Jin Zhang is providing fresh insight into one of the more insidious culprits of wage discrimination: corporate pay secrecy practices.

“Pay secrecy rules and practices refer to corporate contracts and internal rules that prohibit or discourage employees from disclosing their wages to co-workers,” Dr Zhang said.

“If discriminated individuals don’t know what other workers are paid, they are unaware that they are being underpaid, and this allows the cycle of discrimination to continue.”

The Department of Accounting senior lecturer said research has already proven that pay transparency helps reduce the gender wage gap.

What it hasn’t shown are the positive impacts on productivity, innovation and diversity. Until now.

A catalyst for corporate innovation

Dr Zhang said her paper – to be published in the RAND Journal of Economics in 2024 – examined the effect of pay secrecy practices on productivity levels between male and female researchers in the U.S.

“In the U.S., several states have passed laws to eliminate or mitigate corporate pay secrecy rules and practices,” Dr Zhang said.

“We exploit the staggered adoption of these laws across different states, using patenting data to measure the impact on personal productivity across public and private companies.”

The sheer scale of the study is impressive, boasting a sample size of 67,685 observations from different firms over 42 years.

The findings reveal states with laws banning pay secrecy experience a significant boost in innovation, measured by patent outputs.

“On average, companies headquartered in states that have adopted pay secrecy laws increased their number of patents by 10.5%, relative to companies headquartered in other states,” she said.

The quality of these patents also sees a remarkable uptick, with forward citations, generality, and originality rising by 13.4%, 8.4%, and 5.9%, respectively.

The link between pay and performance

Dr Zhang said the study had also uncovered a compelling link between reduced pay discrimination and improved performance.

The impact was particularly pronounced among minority inventors, historically at a greater disadvantage and more prone to underpayment.

“We found transparent pay structures diminish the ambiguity surrounding employee rewards, fuelling heightened motivation and dedication to their work,” she said.

“Our research also demonstrated that pay transparency results in increased salaries for minority scientists and engineers when compared to their counterparts.”

Cultivating a culture of collaboration

Crucially, the study found pay transparency doesn’t exclusively serve discriminated minorities; it is a boon for the entire workforce and, consequently, the organisation as a whole.

The work demonstrated that reduced uncertainty regarding return on effort cultivates a collaborative environment where individuals are more likely to cooperate, Dr Zhang said.

When companies are open about how much senior colleagues get paid, it also encourages more inventors to seek promotion, and this leads to a more diverse leadership.

“Previously, people may have perceived that the elimination of pay discrimination only benefits minorities,” she said.

“However, we show that the reduction of pay discrimination also benefits others, as minorities become more willing to participate in teamwork, and that more diversified teams tend to be more innovative.”

‘Great news for all Australians’

While the research focuses on the U.S., Dr Zhang said the work has implications for Australia.

This is particularly true in light of recent changes to the Fair Work Act banning secrecy clauses in contracts and workplace policies, which came into effect on 7 June this year.

“Gender-based compensation discrimination is prevalent worldwide, and that includes Australia,” Dr Zhang said.

“Our findings suggest the recent amendment to the Fair Work Act will help reduce pay gaps over time, and not only benefit minorities but also the broader society.

“So, it’s great news for all Australians.”

Published on 20 Mar 2024