Does Pay Transparency Among Employees Affect Product Quality?

Abstract

<p>The push for pay transparency as a mechanism to promote fairness in employee compensation has recently gained momentum. In this study, we exploit the state-level staggered adoption of pay transparency laws to study how pay transparency affects firms’ product quality. We find a reduction in product quality for firms headquartered in states adopting pay transparency laws, suggesting that pay transparency may result in reduced workforce quality and increased worker unhappiness and disharmony. Further supporting this theory is evidence that the quality reduction is more pronounced for firms facing greater risk of losing key employees or experiencing poorer worker attitudes. Additional analysis reveals that product market competition attenuates the negative impact of pay transparency on product quality and that pay transparency increases not only the likelihood but also the severity of product recalls. Last, we document that when pay transparency negatively impacts firms’ product quality, the firms’ future performance also suffers.<br></p>