Signaling in Secret: Pay for Performance and the Incentive and Sorting Effects of Pay Secrecy

Abstract

Although the vast majority of U.S. firms follow a policy of pay secrecy, research provides a limited understanding of its overall utility to organizations. Building on signaling theory, we develop and test a model of the incentive and sorting effects of pay secrecy—a pay communication policy that limits employees' access to pay-related information and discourages the discussion of pay issues—under varying pay-for-performance (PFP) system characteristics. Results of a multiround laboratory simulation largely support the proposed moderated-mediation model. They indicate that pay secrecy has an adverse impact on individual task performance that is mediated by PFP perceptions, amplified when pay determination criteria are relative (as opposed to absolute), and attenuated when performance assessment is objective (as opposed to subjective). Results also indicate that pay secrecy has a similar adverse effect on participant continuation intentions (mediated through PFP perceptions, amplified when pay determination criteria are relative, and attenuated when performance assessment is objective), particularly among high performers. These findings suggest that weak signals associated with a particular managerial practice may become salient when interpreted in the context of other practice-based signals and that, under such conditions, even weak signals may drive negative-oriented inferences, having important behavioral implications.

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