Many years ago when I read Dr. Ed. Lawler's book "Pay and Organizational Development" I had discovered this research based theoretical construct. Ever sine then I have seen the validity of this concept in real life.
The more employees know about their pay - how the pay determination process works and how the individual pay decision that affects them were made, the more satisfied with pay the employee will be. Transparency with everything about pay is a crucial step in the effective design of pay systems. The more secret the pay system is the more ineffective it will be.
This is simply because employees are not necessarily concerned about what they get paid but with how their pay decision was made. They judge the "fairness", the "appropriateness" and the "simplicity" of the pay system more than anything else.
Researchers have found that there is a direct correlation between pay knowledge and pay satisfaction. The more staff knows about how pay is set and how they can improve their pay level, the happier they are with their pay, job & level. It has been determined that pay processes are often not well understood by employees and managers. Researchers have found that employees are more satisfied with the amount of their compensation than with the process used to determine it. Also note that pay knowledge and performance management knowledge is positively associated with organizational effectiveness. In many firms, pay is a guarded topic, but those companies who shared information with their employees found that openness yielded high returns in retention, commitment and trust in management.
Thus "pay secrecy" needs to be eliminated if the system is going to be an effective one.
Thus the key I have found is open communication about everything about the organization's pay system.
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