The setting of pay rates – why exactly people make the amount they do – is shrouded in mystery. Ever was it thus. Companies have never wanted to shine a bright light on employees’ paychecks nor delve too deeply into what they should pay.

Few employees are willing to enter a frank discussion about the digits on their checks, either. It’s one of the most enduring taboos of corporate life.

Everyone has their reasons. Employers face too many imponderables – it’s hard to figure out what most employees contribute to corporate coffers – and transparency could open all kinds of cans of worms. Many people would rather not know how they are valued compared to their peers, considering how much our jobs and pay rate underpin our identities.

But the result, says Jake Rosenfeld, author, and sociology professor at Washington University in St. Louis, is an often unequal playing field. Most pay rates are based on history – the pay rate a company has offered in the past, plus employees’ previous earnings – and market rates. Few other factors come into play.

In his book You’re Paid What You’re Worth: And Other Myths of the Modern Economy, Rosenfeld blows the doors off the vault of stubborn but unfounded beliefs that underlie our notion of employee compensation.

Jake Rosenfeld, author of You’re Paid What You’re Worth: And Other Myths of the Modern Economy.

We asked Rosenfeld about the most persistent myths associated with employee compensation, why they are so enduring (and harmful), and what it will take for employers to do better.

Spoiler alert: There is no magic formula.

SAP Insights: In your book, you discuss pay transparency in depth, giving the history of the topic and why both bosses and workers traditionally have avoided it. But it’s documented that pay opacity leads to unfairness. How come this is such a thorny issue?

Jake Rosenfeld: I'm absolutely fascinated by the salary taboo. It’s taken for granted in the academic literature that we have a reluctance to discuss pay. There are exceptions like Norway, where you can look up everyone’s tax returns to see what they made. But elsewhere, there seems to be something fundamental about our unwillingness to disclose our pay.

That said, it does seem to be changing, especially among younger workers. They're much more willing to share their wages and salaries. This taboo could be crumbling underneath our feet.

Q: Is that due to a difference in orientation and temperament with younger people? Or do you think younger workers know talking about salaries will help decrease unfair wages?

Rosenfeld: People are beginning to understand it's important to share and gather as much information as they can to make sure that they're getting what they think they deserve. I also take seriously the idea that as younger generations grow into their prime earning years, the reluctance to share may come back.

But I also wouldn't be surprised if the ground is shifting. Many U.S. states are passing laws requiring disclosure of pay ranges for recruitment purposes. The topic has captured media attention, too. Word has gotten out that you should be much less reluctant to talk about pay because you may be getting underpaid and not know it.

Q: As you write, employees have tended to be reluctant to discuss pay because they don’t want to know whether their pay is higher or lower versus their colleagues. Meanwhile, you argue that bosses don’t want anyone to discuss pay to keep unfair pay structures under wraps, saving the organization money overall. Their interests, though different, have aligned to keep pay rates secret.

Rosenfeld: Absolutely. On the worker side, especially as you get into the upper-middle-class professions, our jobs are tied up with our sense of purpose and identity. People also tend to believe that our pay is ultimately tied to how well we're doing at work.

Q: Why did you write this book? Who are you hoping to reach?

Rosenfeld: Not many academics share my fascination with pay setting. But the more I dug in, the more I read case studies, the more I surveyed U.S. workers, the messier and more interesting it was. It quickly became clear the textbook models bear little resemblance to the real world of pay setting.

Although I’m hoping to reach my colleagues in academia, business leaders have their own questions. I've talked to employers, and they tell me about feeling insecure when setting pay rates. They say they often feel they really don't know what they are doing when it comes to pay.

I try to reassure them there's no exact science here. Everyone must deal with the messy, real phenomenon of trying to put a price on human labor. That's always going to be a challenge and will raise all sorts of thorny moral concerns.

Q: At the beginning of your book, you sketch out four dynamics that influence how and what people are paid: equity or fairness, mimicry, power, and inertia. Would you please take them one by one and tell us what concerns you about them?

Rosenfeld: Let’s take fairness first. You're dealing with human beings, who often think they are underpaid. We all would like more money. And when you survey workers, very few say they’re overpaid.

Employers have to be very delicate when approaching pay issues because they affect employee morale. But if they have a compensation structure they can defend openly, and explain why person X is making more than person Y, that generally goes a long way to engendering worker buy-in. Too often employers either don't have anything as organized as that, or they feel that if they share it, their employees won't support it. And that's where real issues can arise.

Mimicry is paying the market rate, which is an understandable shortcut. But it means only that employers are surveying similar employers, finding out what they're doing, and making tiny adjustments to go a little above or a little below the average. It's easy to justify to workers: “Hey, we can't go that far above what our competitors are paying, because that will put us at a disadvantage.”

Then there’s power. In the United States, power is held primarily with whoever pays. Workers have some power, but it differs according to their position in the organization, from the cleaning staff to the C-suite. They also come into the organization with different levels of power. That affects their ability to stake their claim for their share of revenue – that is, their wages and salaries. Their success will be based on where they're positioned and whether they have any other sources of power, such as a labor union.

And the last factor is inertia. You do a job interview, and you're offered a starting wage or salary. It has a lot to do with what that company has been paying for that position for time immemorial. Sometimes it's the exact same rate they’ve paid for years because no one has the time to reevaluate every position every six months to decide what it should really be. There is no clear guidance for making that calculation, so inertia often takes hold. And then pay rates are taken for granted.

Q: You write about CEO pay and how disproportionate it has gotten.

Rosenfeld: There's vast literature showing only a very loose correlation between company performance and CEO pay – or none whatsoever.

The idea that you have to pay at the top of the market to attract great talent presumes that you know what’s great. A lot of the time we don't know that. Meanwhile, CEOs have been able to bid up their collective pay because they are being hired from a kind of international market for floating CEOs, rather than being cultivated from inside the organization.

When you ask American workers what they think the average ratio of CEO to worker pay is at a particular firm, respondents say something like 20 to one. When you ask what they think it should be, they say something like five or six to one.

The reality is that overall, a CEO salary is roughly 400 times the average worker’s pay. That said, there doesn’t seem to be a movement to put real pressure on bringing down CEO pay. There are straightforward policies that could accomplish this, but there’s this question of whether the will is there.

Q: As you describe it, the explosion of CEO pay corresponds with the rise in shareholder capitalism. You make a case in the book that running companies for the benefit of shareholders above everyone else is a foe of equity, quality, and safety in the modern world. Including that it induces companies to pay workers as little as they can get away with.

Rosenfeld: There were justifiable reasons the system needed to get shaken up a bit, especially for climbing out of the malaise of the ’70s and ’80s. A lot of corporations were ruled by longtime CEOs. They were pretty unproductive, not innovating in any way, and often getting beaten by international competitors. Shareholders were rightfully upset and wanted to see some returns they weren't getting.

It's just that this activist shareholder movement has a lot of perverse incentives that are doing a real disservice for the companies. For starters, shareholders often view pay increases for average workers warily since that’s money not being redistributed upward.

In the last five to ten years, CEOs have been saying they're tired of it, because they are trading higher CEO pay for less control over what they can do at the company. They are beholden to what the shareholders are demanding – who often do everything they can to jack up short-term stock prices.

There is a widespread belief that CEOs have a fiduciary duty to shareholders, but they don’t, formally. And they are stymied from implementing any investment plan that’s not going to pay off for years, where they invest in new facilities and train up the workforce.

Q: In your view, what will be the likely effect of AI on wages? Ever downward pressure, for those that are lucky to retain their jobs?

Rosenfeld: Technological innovations often get interpreted as the death knell of millions and millions of jobs. That’s yet to happen, right? We’re sitting at a 3.7% unemployment rate.

There will be reshuffling, for sure. The question is whether the reshuffled workers will be able to land in equal, or even possibly more highly paid positions. The extent to which that happens is often due to policy decisions that can be made to cushion the impact of technological innovations. The United States often takes none of those choices. The job retraining policies here are really skimpy, but other countries do it differently.

Q: What do you want senior business leaders to do about pay?

Rosenfeld: It goes back to transparency. There’s more and more evidence that in the American economy today that workers are generally satisfied with their jobs and trust their bosses. Employers should take advantage of that and share their compensation strategy.

I see in my own industry, academia, how everyone feels like they're underpaid. And universities are so deeply reluctant to give even one sentence about “here's how pay is determined here.” That just engenders ill will and distrust, because we then personalize everything: “Oh, my employer doesn't like me, doesn't see the value in my work.” We can see the same dynamic at work in every industry.

Another point: we're in this wave of unionization efforts. But we are seeing kind of a ferocious pushback on the part of employers. I get that in an environment where few of your competitors are unionized, you could be terrified that if your company goes union, you're going to be at a competitive disadvantage. That said, the pushback has its own set of negative consequences.

I have a perhaps naïve hope for this country and the corporate class going forward that there's a way to carve out much more cooperative labor-management relationships where unionization efforts won't be fought to the death and won't be seen as the end of the firm. Because we know from the cross-national picture and from our own history that, in many cases, need not be the case. And higher wages for the average worker will be the welcome result.