Pay Transparency in the Field: Envy-Inducing Social Comparisons May Reduce Job Satisfaction

Following policy shifts and research results about positive effects on employee retention and performance, pay transparency is increasingly debated as a suitable managerial tool in performance management. However, laboratory research in management and economics has pointed to associated costs of transparency (i.e., the “dark side” of pay transparency), among them envy and decays in cooperation. Interestingly, empirical evidence from the field is largely missing in this debate. In the present research, we exploit a naturally occurring shift in the transparency policy of a mid-sized firm to investigate whether falling short of one’s expectations regarding relative pay (i.e., a reference point violation) influences experience of episodic envy and, subsequently, affects job satisfaction. We administered surveys before and after the firm introduced a transparency initiative to measure a transparency-induced update of prior beliefs. The results show an effect of reference point violation on job satisfaction through episodic envy, an effect driven by people who initially hold optimistic views regarding their own relative pay (i.e., those low in victim-sensitivity).