A Theoretical and Experimental Evaluation of Pay Transparency Policies and Payment Schemes

We theoretically and experimentally examine the impact of pay transparency policies and payment schemes on individuals’ effort decisions and their performance. By considering the “no information” policy as a benchmark that only informs each agent of his own performance and pay, we examine two pay transparency policies that offer additional information: (a) an “aggregate information” policy disclosing the average performance and pay; and (b) a “full information” policy disclosing everyone’s performance and pay. We determine and compare each agent’s optimal effort under different policies. While physical effort and output performance are observable, mental effort such as mental concentration is not easily observable. For this reason, we translate our theoretical results into each agent’s expected performance so that we can establish 3 hypotheses and test them via lab experiments.Our experimental results supported all three hypotheses. Specifically, the experiment shows that relative to the flat-rate payment scheme and the no information policy, the piece-rate payment scheme and both transparency policies improve subjects’ performances, but neither of them works alone. Also, we notice that more granular information provided by the full transparency policy does not entice agents to generate better performance than the aggregate information policy. Finally, our experimental results reveal the presence of social comparison: under both transparency policies, agents exhibit the “behind aversion” behavior but not the “ahead seeking” behavior