Information sharing and power in the modern corporation
by Jake Rosenfeld
The delivery service start-up Jet.com promises many things to its employees, including unlimited vacation, generous parental leave, and meals provided by the company. Many Silicon Valley firms now provide similar perks as they seek to entice workers in a tightening labor market.
What sets Jet.com apart from its peers is the promise of something ostensibly less tangible: financial transparency. The firm offers its salaried employees real-time financial information detailing how the company is performing. Why share such valuable data? The practice is part of the firm’s effort to cultivate a culture of transparency, which, CEO Marc Lore hopes, will engender greater worker trust, happiness, and, in the end, productivity.
Workers and their representatives have fought to “open the books” of their firms for generations. In the United Auto Worker’s strike against General Motors in 1945-1946, union leader Walter Reuther demanded access to the company’s financial information. GM resisted, as did many firms then and as many continue to today, classifying company financial data – information like detailed revenue reports – as proprietary, and off-limits to employees.
The existence of the exceptional companies like Jet.com, who preach and practice transparency, allows us to examine what, if any, tangible consequences financial transparency has on productivity, company profits and worker pay.
While it is too soon to tell whether Lore’s gamble on transparency generates a happier, more productive workforce, my research with fellow sociologist Patrick Denice suggests it could lead to a higher-paid workforce – an outcome Lore may not have intended.
The Power of Transparency
We used detailed survey data from Great Britain on employers and their employees (comparable data in the U.S. do not currently exist) to examine whether workers who reported that their managers are “good” or “very good” at sharing company financial information earn more than otherwise comparable workers who lack access to the company books. We use data from 2004 and 2011, years that predate and postdate the Great Recession.
Among other factors, what makes this dataset – the Workplace Employment Relations Survey (WERS) – unique is its rich set of questions asking about transparency in the workplace. These questions allow us to examine a relatively unstudied aspect of the modern workplace. As management scholars Claudia J. Ferrante and Denise Rousseau have noted, scholars “have paid little attention to the dissemination and use of financial information among workers.” We have begun to a fill this gap.
After statistically controlling for a range of factors found to influence how much money one makes, we discovered that workers who say their managers are “very good” at sharing company financial information earn, on average, 8 to 12 percent more than workers who report their bosses are “very poor” at financial transparency.
These positive effects persist even after adjusting for detailed worker-level characteristics such as occupation, education, age, experience, tenure at the particular firm, as well as company-level characteristics such as workplace size and workplace age. And the transparency effect sizes we uncover are substantial: twice as large as the marriage wage premium, and similar to the gender pay disparity.
What accounts for the positive relationship between financial transparency and worker pay? Following past research by management scholar Jeffrey Pfeffer and others, we believe that knowledge of organizational dynamics such as financial data is a key workplace resource, one that has the potential to shift power dynamics within the firm. Financial information can prove powerful to the extent it reduces information asymmetries at work.
As the legal scholar Cynthia Estlund has argued, information asymmetries exist in even the most open workplaces, and the unequal distribution of key organizational information privileges those in the know. How so? Knowledge of one’s workplace finances arms workers with a sense of the available resources. And, we maintain, learning the size the potential pie gives workers a powerful resource to bargain with, may increase the likelihood of bargaining in the first place (and, research has found that bargaining matters), and raises the chance of success when bargaining. From the manager’s perspective, it is much harder to deny a worker’s demand for a raise if the worker knows your company is flush.
The Limits of Transparency
What, then, should Jet.com’s CEO expect from his experiment with transparency? Our research uncovered little evidence that financial transparency is directly correlated with company profit or productivity levels. That is, of course, on average, and thus it may be that CEO Lore has concocted the right alchemy of incentives, practices, and corporate values to translate transparency to greater employee effort and loyalty, which could pay off in the terms of the firm’s bottom-line.
What does emerge clearly from our investigation is a strong, positive relationship between managerial transparency and worker pay. How this dynamic actually plays out in workplaces awaits further research, as the data we rely on does not get us into the detailed back-and-forth processes that determine wage rates. For example, does transparency lead to higher pay primarily at the individual-level, with individual workers using information to negotiate one-on-one with their managers? Or is it primarily a collective process, whereby groups of workers, armed with firm financial data, are able to leverage higher wage rates for all?
These and other important questions await further research. Our investigation substantiates Jeffrey Pfeffer’s claim from nearly two decades back that “Information is power, and sharing information diffuses that power.” It remains an open question whether Jet.com’s leadership – and other like-minded managements – will continue to share financial information if this involves willingly ceding some power to employees.
Jake Rosenfeld is Associate Professor of Sociology at Washington University-St. Louis.
This article is based on “The Power of Transparency: Evidence from a British Workplace Survey,” published in the American Sociological Review.