The implications of pay transparency in the presence of over- and underconfident agents

Fan, Xiaoshuai1; Wu, Qingye1; Chen, Ying-Ju2; Tang, Christopher S.3

2023-03-01

10.1111/poms.13975

PRODUCTION AND OPERATIONS MANAGEMENT   Impact Factor & Quartile

1059-1478

1937-5956

Many companies are under pressure to improve pay transparency; however, its impact on their agents and principals remains unclear. As a way to investigate the upside and downside of pay transparency, we conduct our study based on a scenario in which agents have "cognitive bias" (namely, over- or underconfident). We also capture the notion of "social comparisons" behavior (namely, behind-averse and ahead-seeking) that occurs under pay transparency. By exploring a one-principal-two-agent model, we find that agents' optimal effort decisions are affected by the "intersection" between agents' social comparison behavior and cognitive bias. Specifically, relative to the opaque policy, we find that pay transparency can entice agents to improve their job performance (in general). Our analysis also provides a guideline for principals to implement transparent payment policies properly (including the optimal payment scheme and the recruitment strategy). Specifically, pay transparency could enable the principal to offer a lower merit-based factor level but a higher base salary level than opaque policy to motivate agents. To obtain high retained earnings, it is profitable for the principal to hire an overconfident agent if the principal chooses to adopt the opaque policy, but hire a mildly underconfident agent if pay transparency is selected. Moreover, we extend the base model to incorporate working capability heterogeneity across agents. We find that the agent's effort incentive and his opponent's working capability move in the same direction when the two agents' working capabilities are comparable under the transparent policy. Finally, by incorporating the environment's relative favoritism into the base model, we observe that when the environment is highly uncertain, the underconfident agent is willing to leverage environment uncertainty but the overconfident agent is willing to exert more effort.

behavioral operations over- and underconfidence pay transparency social preference

SCI

English

First ; Corresponding

National Natural Science Foundation of China[72101105] ; Hong Kong RGC[GRF 16500821] ; HKUST[C6020-21GF]

Engineering ; Operations Research & Management Science

Engineering, Manufacturing ; Operations Research & Management Science

WOS:000956676300001

WILEY

ENGINEERING

Web of Science

1.Southern Univ Sci & Technol, Coll Business, Shenzhen, Guangdong, Peoples R China
2.Hong Kong Univ Sci & Technol, Sch Business & Management ISOM, Hong Kong, Peoples R China
3.UCLA Anderson Sch, Los Angeles, CA USA

Fan, Xiaoshuai,Wu, Qingye,Chen, Ying-Ju,et al. The implications of pay transparency in the presence of over- and underconfident agents[J]. PRODUCTION AND OPERATIONS MANAGEMENT,2023.

Fan, Xiaoshuai,Wu, Qingye,Chen, Ying-Ju,&Tang, Christopher S..(2023).The implications of pay transparency in the presence of over- and underconfident agents.PRODUCTION AND OPERATIONS MANAGEMENT.

Fan, Xiaoshuai,et al."The implications of pay transparency in the presence of over- and underconfident agents".PRODUCTION AND OPERATIONS MANAGEMENT (2023).