Boards want more output while morale is sliding. Global employee engagement has fallen to 20 percent, with Gallup estimating roughly 9 percent of global GDP, about 10 trillion dollars, lost to low engagement (Gallup, 2025). Manager engagement has slipped as well, down to 22 percent in 2025 from 27 percent in 2024, and nine points lower than in 2022 (Gallup, 2025). In that climate, many leaders reach for pay transparency. It can work. It can also backfire.
What the best evidence actually shows
The cleanest field evidence we have on how pay information changes behavior comes from a large Southeast Asian bank that let researchers run incentivized surveys and information experiments with 2,060 employees (Cullen and Perez-Truglia, 2022). Two facts matter for design. First, employees systematically misjudge what their managers earn, underestimating by 14.1 percent on average, with an average absolute error of 28 percent. They are more accurate about peers, with an average absolute error of 11.5 percent and no systematic bias (Cullen and Perez-Truglia, 2022).
Second, learning about pay shifts effort, but not symmetrically. When employees discovered that their manager made more than they thought, they worked more. A 10 percent increase in the perceived salary of the boss led to a 1.5 percent increase in hours worked over the next 90 days, an elasticity of 0.150 with strong statistical significance (Cullen and Perez-Truglia, 2022). The same study found the opposite pattern for horizontal comparisons: learning that a peer earns more reduced motivation. The authors document that vertical comparisons tend to motivate while horizontal comparisons tend to demotivate in this setting (Cullen and Perez-Truglia, 2022).
This is not a Silicon Valley vignette. It is a preregistered natural field experiment with administrative data published in a top economics journal. It is also one company in one country, so leaders should treat it as the best-tested direction of travel, not an iron law.
Why flatter structures need teaching, not teasing
Self-managing organizations reduce or eliminate the manager–subordinate relationship by decentralizing authority in a formal and systematic way (Lee and Edmondson, 2017). The upside is agility on complex, cross-functional work. The risk is a vacuum where the vertical line of sight used to live. If there is no boss ladder, what do employees look up to? In conventional hierarchies, manager pay acts as a visible beacon of progress. In flatter designs, that beacon can disappear unless the system puts something equally legible in its place.
The lesson from the bank experiment generalizes as a design principle. Give people clear signals about what “up” looks like, and effort follows. Dangle cross-row comparisons, and you invite corrosive status contests that drain energy. In SMOs, the fix is not to hide pay. It is to make role progressions, skill tiers, and the economics of stewardship explicit, so transparency points up a path rather than across to a rival. That preserves the motivational channel the evidence identifies while avoiding the demotivating one.
Make transparency a learning system
Transparency works only if people can ask about gaps and paths without fear. Psychological safety, defined as a shared belief that the team is safe for interpersonal risk taking, is associated with more learning behavior, which in turn links to better performance in field data from 51 work teams in a manufacturing company (Edmondson, 1999). The construct is foundational in the literature, but the original study is cross-sectional and within one firm, so treat it as a robust association, not causal proof.
Applied to pay, the implication is practical. If a developer sees that “Senior II” earns more than she does, she needs a safe forum to ask what skills and contributions close the gap. Without that learning channel, transparency becomes a tease. With it, transparency becomes a curriculum.
The practical read
If engagement is as costly as Gallup estimates, then incentive design is not a hygiene issue, it is an energy policy (Gallup, 2025). Treat pay transparency as an operating system, not a disclosure stunt. Four moves follow from the evidence and the organizational realities of 2020s firms:
- Anchor transparency vertically. Publish pay ranges for roles and levels, and explain the economics of leadership or stewardship stipends. Avoid real-time peer-to-peer pay disclosures that invite lateral comparisons that the field evidence ties to demotivation (Cullen and Perez-Truglia, 2022).
- Teach the path. For each role band, document the skills, scope, and decision rights that justify movement. In flatter structures that reduce manager–subordinate ties, this restores a visible ladder that is compatible with distributed authority (Lee and Edmondson, 2017).
- Pair numbers with forums. Create recurring, low-stakes sessions where people can ask compensation questions and get feedback on development plans. Do this at the team level, where psychological safety can be built and maintained, because learning behavior is the bridge from safety to performance (Edmondson, 1999).
- Protect managers’ attention. Manager engagement has fallen sharply since 2022, with the steepest drop between 2024 and 2025 (Gallup, 2025). A clear, role-based transparency system reduces ad hoc pay debates and frees managers to coach on the capabilities that move people up the ladder rather than arbitrate peer comparisons.
This is a conservative reading of the data. It does not require betting on radical pay experiments, only that you aim transparency where the evidence says it energizes. Use it to show progress, teach mechanics, and build forums where people can talk about both. The prize is not just fairness optics. It is discretionary effort today, and a healthier pipeline of talent tomorrow.
Sources
- Cullen and Perez-Truglia (2022). How Much Does Your Boss Make? The Effects of Salary Comparisons, Journal of Political Economy. A natural field experiment at a Southeast Asian bank shows upward pay comparisons increase hours worked while peer comparisons demotivate, and documents large misperceptions of manager pay. https://doi.org/10.1086/717891
- Lee and Edmondson (2017). Self-managing organizations: Exploring the limits of less-hierarchical organizing, Research in Organizational Behavior. A peer-reviewed synthesis that defines self-managing organizations and explains how removing manager–subordinate ties alters motivation and coordination challenges relevant to pay design. https://www.sciencedirect.com/science/article/abs/pii/S0191308517300059
- Edmondson (1999). Psychological Safety and Learning Behavior in Work Teams, Administrative Science Quarterly. A field study linking team psychological safety to learning behavior, which mediates performance, supporting the case for pairing transparency with learning forums. https://journals.sagepub.com/doi/10.2307/2666999
- Gallup (2025). State of the Global Workplace 2025. Reports global engagement at 20 percent, about 10 trillion dollars or 9 percent of GDP in lost productivity, and a recent drop in manager engagement, underscoring the stakes of effective incentive design. https://www.gallup.com/workplace/659610/state-global-workplace.aspx