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Pay Transparency in Organizations

Author

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  • Amir Habibi

    (HU Berlin)

Abstract

I study when a firm prefers to be transparent about pay using a simple multidimensional signaling model. Pay transparency within the firm means that a worker can learn about his own worker-firm match from another worker’s pay. This can either encourage or discourage workers—which affects retention—and so creates a trade-off for the firm when it commits to a level of transparency. The model pre- dicts that when few workers have a high worker-firm match, transparency is always preferred by the firm and becomes more favorable as the value of retaining these ‘star’ workers increases. This prediction is consistent with the firms in the field that choose to be internally transparent about pay. The model also predicts that transparency leads to pay compression, again consistent with evidence from the field.

Suggested Citation

  • Amir Habibi, 2023. "Pay Transparency in Organizations," Rationality and Competition Discussion Paper Series 395, CRC TRR 190 Rationality and Competition.
  • Handle: RePEc:rco:dpaper:395
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    References listed on IDEAS

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    More about this item

    Keywords

    pay transparency; bonus pay; multidimensional signaling; relative pay;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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