Pay Transparency in Organisations

I study when a firm prefers to be transparent about pay using a simple multidimensional signalling model. Pay transparency within the firm means that a worker can learn about their own productivity 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 optimal decision of the firm depends on the setting—in some settings transparency is optimal and in others no transparency is optimal. The main result is that increasing the firm's value of retaining its most productive workers makes transparency more favourable. My model also provides a rational explanation for empirical findings in the relative pay literature that have thus far been explained by non-standard preferences