Your organization is considering implementing a merit pay plan in the hopes of increasing ...

Pay secrecy can threaten the effectiveness of merit pay plans. The problem is that even if merit pay is administered fairly, is contingent on performance, and is generous, employees might remain ignorant of these facts because they have no way of comparing their own merit pay with that of others. As a consequence, such secrecy might severely damage the motivational potential impact of a well-designed merit plan. To make matters worse, in the absence of better information, employees are inclined to “invent” salaries for other members and this can reduce both satisfaction and motivation. Several studies have found that managers have a tendency to overestimate the pay of their employees and their peers and to underestimate the pay of their superiors. This can reduce satisfaction with pay, damage perceptions of the linkage between performance and rewards, and reduce the valence of promotion to a higher level of management.