Where Inequality Matters
People do care about their income relative to others, especially coworkers:
A randomly chosen subset of employees of the University of California was informed about a new website listing the pay of all University employees. … The vast majority of new users access[ed] data on the pay of colleagues in their own department. … Workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. (more)
If, as seems likely, coworker envy is much stronger than envy of distant strangers, then it is good to let each firm choose its internal level of inequality. They internalize most of the envy externality, and so have good incentives to trade that against other relevant considerations in choosing employee incomes.
I like the current system somewhat, where government for the most part has very public and standardized pay grades, while private industry is all over the map, but generally with lots of variation and hiding. The level of irrationality about pay and self-worth is so high that there is no reason to believe that freer flow of information would lead to a more efficient system. In my case, I love bonuses and no raises. I will barely remember I made $10,000 more last year because of a super bonus that was not repeated, but a $2000 pay cut will fry my eggs.
UC is a government controlled school. You will not find that kind of openness or standardization at a private university (unless it is being run by someone driven by theory over experience.)
of course no one would ever consider that they are a below average worker.