What is compensation transparency?

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

It is not without its pitfalls, however. It is important to be as upfront with everyone, whether they are employees or contract workers, at all levels. But there is a growing body of evidence which shows that compensation transparency is an important tool for recruitment and well being of the entire team.

Understanding transparency

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

Transparency is something which has to be built into the company from the start, however, in order to be effective.  If the team which defines the company relies on and values transparency, it becomes a basic company value. While not a 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 of every organization has to operate under it to the extent that it possibly can in all policies. That starts with compensation transparency and a strong belief that the team is indeed working together for the same goals with the same rewards.

How compensation transparency works

When selecting 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, or pay and benefits based on each team members role. When this model is chosen, compensation transparency becomes a simple matter of telling everyone exactly what they can expect even before they become an employee or contract worker.

This has been shown to be 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 getting a reward 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 much more closely, completing tasks more quickly and with less argument.

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

Still a new idea

Because compensation transparency is still a relatively new concept, much of the work defining its effectiveness is based on criticism of standard policies of salary secrecy. There are good examples of compensation transparency being implemented, however, and the results are generally positive.

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

Potential problems

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

For example, workers with different skill sets can suddenly find out 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 has 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 generally 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 a new company quickly build the teams necessary 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.

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