Pay disclosure: Information is power

16 August 2018

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Robert Breunig is a Professor at Crawford School of Public Policy in the ANU College of Asia and the Pacific. Robert is also Director of Crawford School’s International Development and Economics Program. He teaches Economics for Government POGO8081 and regularly teaches in Crawford School’s Executive Education program.

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In this Austaxpolicy piece, Kristen Sobeck and Robert Breunig analyse pay transparency around the world and its impacts.

Across the globe, recent headlines highlight the public outcry observed from pay inequality revealed by company pay disclosures. While these disclosures focused on the pay disparity between men and women, the implications are clear: the revelations obligated companies to reflect on their pay practices and empowered employees, in particular women, to seek redress.

These global and public disclosures raise questions about the extent to which pay disclosure policies can and should be used to reduce the pay disparities engendered by the lack of pay transparency.

Trends across the world

Public pay disclosure practices vary considerably within and across countries. They also differ in terms of the amount of information published and the level of aggregation.

At one end of the spectrum are countries like Norway, which publicly discloses total income and total tax paid, by first and last name of the taxpayer, on the tax authority’s website. Similar policies exist in Sweden and Finland.

In the middle are those countries where pay transparency is indirectly available because of the type of industrial relations system, or where national government regulation requires it. This is the case in countries where collective bargaining coverage is high. For example, in Austria, France, and Belgium, collective bargaining coverage exceeds 90% of employees and wage rates are publicly available. The United Kingdom also falls in this middle category in light of its recent national legislation, which requires all companies with at least 250 employees to publish data on the gender pay gap from April 2018.

At the other end of the spectrum are those countries where pay disclosure, or the lack thereof, depends entirely on the individual company or subnational government practices. For example, pay non-disclosure clauses are common in Croatia, Estonia, Hungary, Liechtenstein, Latvia, and Poland, where wages are predominantly set by individual negotiations.

The United States also fits into this third category, even though these non-disclosure clauses are in violation of Section 7 of the National Labor Relations Act (NLRA), which protects workers in “concerted activities for the purpose of collective bargaining or other mutual aid or protection”. Despite their illegality, non-disclosure agreements are common for various reasons which include the NLRA’s limited coverage (it excludes supervisors and managers), a lack of information, and the mild penalties associated with violating the Act.

In response to non-disclosure clauses in the United States, at least 11 states have passed their own legislation, which prohibits or limits the use of such clauses. Some companies, universities, and local governments have also taken matters into their own hands. For example, Whole Foods, a supermarket chain, has published salary ranges internally since 1986.

Pay disclosure in Australia

Australia arguably falls in the middle category of country practices regarding pay disclosure.

About 59% of employees were covered by an award or collective agreement in 2016. The terms and conditions of collective agreements, which include salary information, are also publicly available from the Fair Work Commission. It is important to bear in mind however, that while base pay in collective agreements tends to be public, payments over and above (performance payments, for instance) are not disclosed. Moreover, a person’s entry point on the salary scale, in a company covered by an enterprise agreement, may partially depend on their negotiation prowess.

Turning to the public sector, the remuneration for senior jobs in Commonwealth bodies is set by the Australian Government’s Remuneration Tribunal and is publicly disclosed individually by position on its website. Data are also publicly disclosed by level (graduate, APS1 to SES3) for all public sector employees in the Australian Public Service Commission’s annual remuneration report.

Government-owned businesses, like Australia Post or NBN Co, had an obligation to report executive remuneration prior to 2015. Since then, new reporting rules only require these entities to report “the cost to the Commonwealth of employing senior management personnel for the reporting period, but not reporting the individual benefits received by those persons.”

Australia Post requested that a parliamentary committee not publicly disclose the information to prevent “unwarranted media attention”, “brand damage” or “be prejudicial to the individuals involved”. This request was not honoured and the $5.2 million salary awarded to the Australia Post Managing Director and Group CEO was publicized, to public outcry.

ABC and SBS, media companies which receive public funding, also disclose the number of staff earning more than $200,000 but not the names of these staff members. A current dispute is underway between both companies and the Communications Minister regarding the legality of this non-disclosure. SBS claims that disclosing the names of individuals with salaries exceeding $200,000 would breach the Privacy Act 1988.

Legally, employment contracts in Australia can include clauses which prevent workers from discussing their pay. Had it been adopted, the Fair Work Amendment (Gender Pay Gap) Bill 2015, would have modified the Fair Work Act 2009 to remove these legal prohibitions.

The costs and benefits of pay transparency

Given the varying practices across the globe, what does the evidence suggest about the effects of pay transparency policies?

The most cogent economic argument in favour of pay disclosure is the elimination of asymmetric information. Perfect information is one of the key assumptions underlying theories of competition, which prevent monopoly power and excess profit. The country and company practices described above however, clearly demonstrate that the price of labour is anything but transparent.

Information can also help to redress discrimination and favouritism. It can empower marginalized groups to organize and demand better conditions through collective means. Unions provide one avenue to increase collective worker power vis-à-vis firms using information. Information can also empower individuals to negotiate better working conditions and pay for themselves.

Djankov et al. (2010) found, using data from 175 countries, that public pay disclosure of members of parliament is correlated with lower perceived corruption and better government. There is also evidence that pay transparency corrects misperceptions. In Norway, Ricardo Perez-Truglia (2016) found that pay transparency increased the happiness gap between the rich and the poor. As a result, social preferences for redistribution increased among those who realized they were relatively less well-off.

But are there costs associated with pay transparency?

Firms have a financial interest in retaining policies that maintain pay opacity, as it may be profitable. If the firm is able to underpay some individuals by keeping the salaries of other employees a secret, the firm will want to maintain such secrecy. By contrast, transparency could be costly. A pay disclosure policy would require a firm to justify and redress pay differences between employees carrying out the same jobs and those of equal value, or employees may seek employment elsewhere (Card et al. 2012). In Norway, where tax records were made available online in 2001, the disclosure increased both the job separation rate and earnings (Rege & Solli 2014). Such increased labor mobility and potentially better job matches between workers and jobs is probably a good thing.

Another cost relates to the potential loss of talent in companies or sectors, like the public sector, where there may be public aversion to salaries perceived as excessive (Mas 2017).

There are potentially unintended consequences, particularly related to privacy. When the Norwegian tax data was initially disclosed, there was an explosion of interest to the extent that a mobile phone app was developed to permit users to visually compare incomes with friends and neighbors on a map. Concerns over the use of such data for nefarious means, particularly by criminals, at least partially prompted a revision of the Norwegian policy—anonymous searching was banned from 2014.

While privacy concerns are understandable among individuals, the question for policymakers is whether they override the potential gains to be made by the public from pay disclosure, particularly in the current data information age. Much of what was once considered private information has been attained through online search and purchase histories, and sold to the private sector for commercial purposes.

Should we have more pay transparency?

More pay transparency would likely realign the bargaining power between employers and employees and potentially improve outcomes for workers, employers, and society as a whole. It could encourage firms to develop more transparent mechanisms for pay determination. Privacy concerns could be mitigated through careful design and implementation of a transparency policy. For example, if the objective of pay disclosure is to promote transparency among peers in the same company or industry, then information could be published at aggregated levels. Information revealed from such a pay disclosure policy could empower those individuals who would benefit most, while preventing its exploitation or misuse.

This post and podcast was first published on the Austaxpolicy blog, the Tax and Transfer Policy Institute’s platform for research and analysis for public benefit.

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