Sooner or later the lower paid employees are either going to get the feeling that all the necessary secrecy around salaries means they’re getting screwed (because, um, they are) or find out that someone got a raise by quitting, and go about doing it themselves.
A good axiom I've always gone with is that the amount of pressure and process a given company has built into promoting secrecy about pay is inversely proportional to my desire to work for them. If you're asked by management to never discuss salary with your peers, you know they're screwing people.
My first day at one employer, my HR rep scribbled some numbers on a paper and slid it over to me, saying, "Now this is your annual salary. We consider compensation to be confidential, and ask that you do not discuss it with anyone."
"Understood," I replied. "And you don't have to worry: I'm just as ashamed of it as you are."
It's a productivity killer. If everyone knows that John is a better developer than Bill, but Bill gets paid twice as much because he understands corporate politics, then people focus on politics, feel like life is unfair, etc. The money saved by underpaying your best employees is rarely worth the inevitable productivity hit and loss of talent.
Yes, I agree with Cohen here. Smart companies reward productive, smart employees incrementally, and don't place the burden of negotiation entirely upon them. This is not to say negotiation isn't possible or beneficial to the employee. But if a company rewards employees with regular raises and profit-sharing, negotiation isn't as political.
It creates bad incentive structures internally. Especially when you factor in the findings of behavioral psychology, which suggest that using pay as a performance incentive can actually decrease the quality of peoples' work.
Law firms have an interesting model where everyone is paid in lock-step by seniority, and in practice it works extremely well. Employees uniformly hated the moves some firms made during the recession to get rid of lock-step compensation. I think it actually boils down to a degenerate case of Fog Creek's very uniform compensation scale (there are far fewer variables for in a law firm than a programming shop).
A good axiom I've always gone with is that the amount of pressure and process a given company has built into promoting secrecy about pay is inversely proportional to my desire to work for them. If you're asked by management to never discuss salary with your peers, you know they're screwing people.