Employee engagement is sliding at the very moment firms need every marginal gain in performance. Gallup reports that only 20% of global employees were engaged in 2025, with the cost of lost productivity estimated at roughly 9% of world GDP, and manager engagement has fallen sharply since 2022 (Gallup, 2025). With attention and trust in short supply, pay transparency looks like an obvious fix. The evidence says it can help or hurt, depending on what you reveal and how teams process it.
What the strongest field evidence actually shows
The clearest data come from a natural field experiment inside a multibillion-dollar commercial bank in Southeast Asia. Employees significantly misjudged what their bosses earned, underestimating managers’ pay by 14.1% on average, with an average absolute error of 28%. By contrast, estimates of peers’ pay were less biased, with an average absolute error of 11.5% and no systematic bias (Cullen and Perez-Truglia, 2022).
When the experiment corrected those beliefs, behavior moved. Learning that a manager earned more than previously believed increased effort. A 10% increase in perceived manager pay raised hours worked over the next 90 days by 1.5%, a precise estimate of elasticity from administrative time records (Cullen and Perez-Truglia, 2022). The same design also showed the other edge of the sword. Discovering that a peer earned more tended to reduce effort. The authors’ core takeaway is not that “transparency works” in the abstract, but that vertical comparisons motivate while horizontal comparisons can demotivate, a pattern they identify with experimental evidence rather than anecdotes (Cullen and Perez-Truglia, 2022).
This creates a design problem, not a messaging problem. Reveal information that orients people toward the next rung, not the person at the next desk. Publishing the slope of the ladder, including criteria and ranges for the roles above, is more likely to elicit extra effort than broadcasting name-by-name peer gaps. The same data, framed differently, triggers different behaviors.
Why hierarchy and status shape the effects
The structure around pay does as much work as the numbers. Self-managing organizations decentralize authority in a radical and systematic way, eliminating the manager–subordinate relationship as a defining feature of work, a design Lee and Edmondson synthesize from the research record (Lee and Edmondson, 2017). Their review also underlines a broader point that travels beyond SMOs. Traditional managerial hierarchies are effective at reliable execution in stable environments, but they can stifle cross-boundary problem solving, introduce rigidity, and reinforce status differences that slow people’s development (Lee and Edmondson, 2017).
Pay is one of the most visible markers of status. In a classic hierarchy, exposing fine-grained peer gaps can fixate attention on rank and relative standing. The bank experiment helps explain why that often backfires on effort when comparisons are lateral rather than aspirational (Cullen and Perez-Truglia, 2022). By contrast, making the economics of the next role explicit turns pay into a roadmap. In flatter or self-managing settings, where formal bosses may be absent, the same logic applies. Transparency that clarifies roles, contribution expectations, and pathways for increased scope is more compatible with decentralized authority than transparency that keeps score between neighbors. The goal is to make opportunity salient, not status.
Psychological safety is the moderator
Even the best-designed transparency can turn brittle if people fear that speaking up will be punished. Psychological safety at the team level, defined as a shared belief that the team is safe for interpersonal risk taking, is associated with learning behaviors such as asking for help, admitting errors, and experimenting. In a field study of 51 work teams, learning behaviors mediated the link between team psychological safety and performance. Team efficacy, once psychological safety was considered, did not show the same association with learning (Edmondson, 1999).
The implication for pay transparency is straightforward. Teams with higher psychological safety are better positioned to process sensitive information constructively, converting comparisons into questions about skill-building and criteria rather than into silence or resentment. Transparency without safety invites social threat. Safety without transparency breeds rumor. The two are complements.
A practical transparency stack
Translate the evidence into design moves that orient attention up the ladder, reduce zero-sum peer comparisons, and create the conditions for learning.
- Publish role-based pay ranges and the slope to the next role. Make the economics of progression explicit, including the capabilities and decision rights that differentiate levels. This channels the vertical motivational effect observed in the bank experiment toward skill development rather than rivalry (Cullen and Perez-Truglia, 2022).
- State promotion criteria in plain language, with concrete examples of work that met the bar. Tie criteria to cross-boundary problem solving, not just tenure. This counters the rigidity and status fixation that hierarchical systems can reinforce (Lee and Edmondson, 2017).
- Share peer pay in aggregates, not by name. Teams can see whether groups are within range and whether gaps cluster by function or geography, without inviting unproductive one-to-one comparisons. This respects the horizontal demotivation pattern reported in the field evidence (Cullen and Perez-Truglia, 2022).
- Pair transparency with routines that build psychological safety. Regular retrospectives that surface process issues, norms for asking clarifying questions, and visible responses to mistakes help convert transparency into learning. The association of team psychological safety with learning behaviors, which in turn relates to performance, supports investing here (Edmondson, 1999).
- Track manager experience alongside employee sentiment. Manager engagement has dropped markedly since 2022, yet best-practice organizations report far higher manager engagement than the global average. This gap underscores that engagement is a design outcome, not fate, and that changing information flows like pay transparency should be accompanied by redesign of manager and team roles (Gallup, 2025).
The cost of getting this wrong is not theoretical. With engagement at 20% and managers themselves struggling, few firms can afford to provoke effort-sapping peer contests or to leave employees guessing about what it takes to progress (Gallup, 2025). The strong experimental evidence shows that transparency is not a yes-or-no question, it is a choice about which comparisons you want to make salient and which team conditions you need in place. Show the ladder, not the neighbor. Then help people climb it.
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 shows employees underestimate manager pay, vertical comparisons increase effort, and horizontal comparisons reduce it. 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 defines SMOs and argues managerial hierarchies can entrench status and rigidity that impede development. 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 associates team psychological safety with learning behaviors that mediate performance. https://journals.sagepub.com/doi/10.2307/2666999
- Gallup (2025). State of the Global Workplace 2025. A global survey reports engagement at 20%, a large productivity cost, and a sharp drop in manager engagement since 2022, underscoring the stakes of better work design. https://www.gallup.com/workplace/659610/state-global-workplace.aspx