1932

Abstract

This article describes and evaluates the substantial literature on the performance-, turnover-, and attitude-related outcomes of pay dispersion. In the past 15 years, compensation researchers have identified and pursued the resolution of well-known theoretical dilemmas about reward allocations and, as a result, have made much progress in terms of understanding the consequences of pay structures. This review explores the evolution of several contingencies of these relationships, including the effects of explained versus unexplained variation in pay, the role of work interdependence, and the nature of other pay-system characteristics. The article concludes with a summary evaluation, the proposal of several stylized facts about the consequences of pay dispersion, and a research agenda to aid researchers in addressing unresolved issues in the literature.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-orgpsych-031413-091253
2014-03-21
2024-04-25
Loading full text...

Full text loading...

/deliver/fulltext/orgpsych/1/1/annurev-orgpsych-031413-091253.html?itemId=/content/journals/10.1146/annurev-orgpsych-031413-091253&mimeType=html&fmt=ahah

Literature Cited

  1. Abeler J, Kube S, Altmann S, Wibral M. 2010. Gift exchange and workers’ fairness concerns: when equality is unfair. J. Eur. Econ. Assoc. 8:1299–324 [Google Scholar]
  2. Adams JS. 1963. Toward an understanding of inequity. J. Abnorm. Soc. Psychol. 67:422–36 [Google Scholar]
  3. Aguinis H, O’Boyle E. 2013. Star performers in twenty-first-century organizations. Pers. Psychol. In press. doi: 10.1111/peps.12054 [Google Scholar]
  4. Aime F, Meyer CJ, Humphrey SE. 2010. Legitimacy of team rewards: analyzing legitimacy as a condition for the effectiveness of team incentive designs. J. Bus. Res. 63:60–66 [Google Scholar]
  5. Anderson C, Brown CE. 2010. The functions and dysfunctions of hierarchy. Res. Organ. Behav. 30:55–89
  6. Barth E, Dale-Olsen H. 1999. The employer’s wage policy and worker turnover. In The Creation and Analysis of Matched Employer-Employee Data, ed. JC Haltiwanger, II Lane, JR Spletzer, JJM Theeuwes, KR Troske, pp. 285–312. Amsterdam: Elsevier
  7. Bartling B, Von Siemens FA. 2011. Wage inequality and team production: an experimental analysis. J. Econ. Psychol. 32:1–16 [Google Scholar]
  8. Beaumont PB, Harris RID. 2003. Internal wage structures and organizational performance. Br. J. Ind. Relat. 41:53–70 [Google Scholar]
  9. Becker BE, Huselid MA. 1992. The incentive effects of tournament compensation systems. Adm. Sci. Q. 37:336–50 [Google Scholar]
  10. Beersma B, Hollenbeck JR, Humphrey SE, Moon H, Conlon DE, Ilgen DR. 2003. Cooperation, competition, and team performance: toward a contingency approach. Acad. Manag. J. 46:5572–90 [Google Scholar]
  11. Berri DJ, Jewell RT. 2004. Wage inequality and firm performance: professional basketball’s natural experiment. Atl. Econ. J. 32:130–39 [Google Scholar]
  12. Bishop J. 1987. The recognition and reward of employee performance. J. Labor Econ. 5:36–56 [Google Scholar]
  13. Bloom M. 1999. The performance effects of pay dispersion on individuals and organizations. Acad. Manag. J. 42:25–40 [Google Scholar]
  14. Bloom M, Michel JG. 2002. The relationships among organizational context, pay dispersion, and managerial turnover. Acad. Manag. J. 45:33–42 [Google Scholar]
  15. Brown M. 2001. Unequal pay, unequal responses? Pay referents and their implications for pay level satisfaction. J. Manag. Stud. 38:879–96 [Google Scholar]
  16. Brown MP, Sturman MC, Simmering MJ. 2003. Compensation policy and organizational performance: the efficiency, operational, and financial implications of pay levels and pay structure. Acad. Manag. J. 46:752–62 [Google Scholar]
  17. Cabrales A. 2010. The causes and economic consequences of envy. SERIEs 1:371–86 [Google Scholar]
  18. Carnahan S, Agarwal R, Campbell B. 2012. Heterogeneity in turnover: the effect of relative compensation structures of firms on the employee mobility and entrepreneurship of extreme performers. Strateg. Manag. J. 33:1411–30 [Google Scholar]
  19. Carpenter MA, Sanders WG. 2004. The effects of top management team pay and firm internationalization on MNC performance. J. Manag. 30:509–28 [Google Scholar]
  20. Charness G, Kuhn P. 2007. Does pay inequality affect worker effort? Experimental evidence. J. Labor Econ. 25:693–723 [Google Scholar]
  21. Christie AM, Barling J. 2010. Beyond status: relating status inequality to performance and health in teams. J. Appl. Psychol. 95:920–34 [Google Scholar]
  22. Clark AE, Kristensen N, Westergård-Nielsen N. 2009. Job satisfaction and co-worker wages: status or signal?. Econ. J. 119:430–47 [Google Scholar]
  23. Crosby F. 1976. A model of egoistical relative deprivation. Psychol. Rev. 83:285–113 [Google Scholar]
  24. DeBrock L, Hendricks W, Koenker R. 2004. Pay and performance: the impact of salary distribution on firm-level outcomes in baseball. J. Sports Econ. 5:243–61 [Google Scholar]
  25. Depken CA. 2000. Wage disparity and team productivity: evidence from major league baseball. Econ. Lett. 67:87–92 [Google Scholar]
  26. Ding DZ, Akhtar S, Ge GL. 2009. Effects of inter- and intra-hierarchy wage dispersions on firm performance in Chinese enterprises. Int. J. Hum. Resour. Manag. 20:2370–81 [Google Scholar]
  27. Doty DH, Glick WH. 1994. Typologies as a unique form of theory building: toward improved understanding and modeling. Acad. Manag. Rev. 19:230–51 [Google Scholar]
  28. Downes PE, Choi D. 2014. Employee reactions to pay dispersion: a typology of existing research. Hum. Resour. Manag. Rev. 24:53–66 [Google Scholar]
  29. Drago R, Garvey GT. 1998. Incentives for helping on the job: theory and evidence. J. Labor Econ. 16:11–25 [Google Scholar]
  30. Duffy MK, Ganster DC, Shaw JD. 1998. Positive affective and negative outcomes: the role of tenure and job satisfaction. J. Appl. Psychol. 83:950–59 [Google Scholar]
  31. Duffy MK, Ganster DC, Shaw JD, Johnson JL, Pagon M. 2006. The social context of undermining at work. Organ. Behav. Hum. Decis. Process. 101:105–26 [Google Scholar]
  32. Duffy MK, Scott KL, Shaw JD, Tepper BJ, Aquino K. 2012. A social context model of envy and social undermining. Acad. Manag. J. 55:643–66 [Google Scholar]
  33. Ehrenberg R, Bognanno M. 1990a. Do tournaments have incentive effects?. J. Polit. Econ. 98:1307–24 [Google Scholar]
  34. Ehrenberg R, Bognanno M. 1990b. The incentive effects of tournaments revisited: evidence from the European PGA tour. Ind. Labor Relat. Rev. 43:74–88 [Google Scholar]
  35. Ensley MD, Pearson AW, Sardeshmukh SR. 2007. The negative consequences of pay dispersion in family and non-family top management teams: an exploratory analysis of new venture, high-growth firms. J. Bus. Res. 60:1039–47 [Google Scholar]
  36. Eriksson T. 1999. Executive compensation and tournament theory: empirical tests on Danish data. J. Labor Econ. 17:262–80 [Google Scholar]
  37. Fiss PC, Kennedy MT, Davis GF. 2012. How golden parachutes unfolded: diffusion and variation of a controversial practice. Organ. Sci. 23:1077–99 [Google Scholar]
  38. Franck E, Nüesch S. 2011. The effect of wage dispersion on team outcome and the way team outcome is produced. Appl. Econ. 43:3037–49 [Google Scholar]
  39. Frank RH. 1984. Are workers paid their marginal products?. Am. Econ. Rev. 74:549–71 [Google Scholar]
  40. Fredrickson JW, Davis-Blake A, Sanders WMG. 2010. Sharing the wealth: social comparisons and pay dispersion in the CEO’s top team. Strateg. Manag. J. 31:1031–53 [Google Scholar]
  41. Freeman RB. 2000. Wages around the world: pay across occupations and countries. NBER Work. Pap. 8058, Natl. Bur. Econ. Res., Cambridge, MA
  42. Freeman RB, Gelber AM. 2006. Optimal inequality/optimal incentives: evidence from a tournament. NBER Work. Pap. 12588, Natl. Bur. Econ. Res., Cambridge, MA
  43. Frick B, Prinz J, Winkelmann K. 2003. Pay inequalities and team performance: empirical evidence from the North American major leagues. Int. J. Manpow. 24:472–88 [Google Scholar]
  44. Gerhart BA, Rynes S. 2003. Compensation: Theory, Evidence, and Strategic Implications Thousand Oaks, CA: Sage
  45. Gilsdorf KF, Sukhatme VA. 2007. Testing Rosen’s sequential elimination tournament model: incentives and player performance in professional tennis. J. Sports Econ. 9:287–303 [Google Scholar]
  46. Gilsdorf KF, Sukhatme VA. 2008. Tournament incentives and match outcomes in women’s professional tennis. Appl. Econ. 40:2405–12 [Google Scholar]
  47. Gomez R. 2002. Salary compression and team performance: evidence from the National Hockey League. Z. Betriebswirtschaft 4:203–20 [Google Scholar]
  48. Gupta N, Conroy SA, Delery JE. 2012. The many faces of pay variation. Hum. Resour. Manag. Rev. 22:100–15 [Google Scholar]
  49. Gupta N, Shaw JD. 2014. Employee compensation: the neglected area of HRM research. Hum. Resour. Manag. Rev. 24:1–4 [Google Scholar]
  50. Haltiwanger JC, Vodopivec M. 2003. Worker flows, job flows, and firm wage policies: an analysis of Slovenia. Econ. Transit. 11:253–90 [Google Scholar]
  51. Harbring C, Irlenbusch B. 2008. How many winners are good to have? On tournaments with sabotage. J. Econ. Behav. Organ. 65:682–702 [Google Scholar]
  52. Harbring C, Irlenbusch B. 2011. Sabotage in tournaments: evidence from a laboratory experiment. Manag. Sci. 57:611–27 [Google Scholar]
  53. Harris MM, Anseel F, Lievens F. 2008. Keeping up with the Joneses: a field study of the relationships among upward, lateral, and downward comparisons and pay level satisfaction. J. Appl. Psychol. 93:665–73 [Google Scholar]
  54. He W, Chen CC, Zhang LH. 2004. Rewards-allocation preferences of Chinese employees in the new millennium: the effects of ownership reform, collectivism, and goal priority. Organ. Sci. 15:221–31 [Google Scholar]
  55. Hibbs DA, Locking H. 2000. Wage dispersion and productive efficiency: evidence for Sweden. J. Labor Econ. 18:755–82 [Google Scholar]
  56. Hunnes A. 2009. Internal wage dispersion and firm performance: white-collar evidence. Int. J. Manpow. 30:776–96 [Google Scholar]
  57. Ilmakunnas P, Maliranta M. 2003. Worker inflow, outflow, and churning. Work. Pap. 611, William Davidson Inst., Ann Arbor, MI
  58. Jane WJ. 2010. Raising salary or redistributing it: a panel analysis of Major League Baseball. Econ. Lett. 107:297–99 [Google Scholar]
  59. Jane WJ, San G, Ou YP. 2009. The causality between salary structures and team performance: a panel analysis in a professional baseball league. Int. J. Sport Financ. 4:136–50 [Google Scholar]
  60. Jenkins GD Jr, Mitra A, Gupta N, Shaw JD. 1998. Are financial incentives related to performance? A meta-analytic review of empirical research. J. Appl. Psychol. 83:777–87 [Google Scholar]
  61. Jewell RT, Molina DJ. 2004. Productive efficiency and salary distribution: the case of U.S. Major League Baseball. Scott. J. Polit. Econ. 51:127–42 [Google Scholar]
  62. Kale JR, Reis E, Venkateswaran A. 2009. Rank-order tournaments and incentive alignment: the effect on firm performance. J. Financ. 64:1479–512 [Google Scholar]
  63. Katayama H, Nuch H. 2011. A game-level analysis of salary dispersion and team performance in the National Basketball Association. Appl. Econ. 43:1193–207 [Google Scholar]
  64. Kepes S, Delery J, Gupta N. 2009. Contingencies in the effects of pay range on organizational effectiveness. Pers. Psychol. 62:497–531 [Google Scholar]
  65. Kerr S. 1975. On the folly of rewarding A, while hoping for B. Acad. Manag. J. 18:769–83 [Google Scholar]
  66. Knoeber CR, Thurman WN. 1994. Testing the theory of tournaments: an empirical analysis of broiler production. J. Labor Econ. 12:155–79 [Google Scholar]
  67. Lallemand T, Plasman R, Rycx F. 2004. Intra-firm wage dispersion and firm performance: evidence from linked employer-employee data. Kyklos 57:533–58 [Google Scholar]
  68. Lawler EE III. 1971. Pay and Organizational Effectiveness: A Psychological View New York: McGraw-Hill
  69. Lazear EP. 1999. Personnel economics: past lessons and future directions. J. Labor Econ. 17:199–215 [Google Scholar]
  70. Lazear EP, Moore RL. 1984. Incentives, productivity, and labor contracts. Q. J. Econ. 92:273–95 [Google Scholar]
  71. Lazear EP, Shaw KL. 2008. Wage structure, raises, and mobility. The Structure of Wages: An International Comparison Lazear EP, Shaw KL. Chicago: Univ. Chicago Press [Google Scholar]
  72. Levine DI. 1991. Cohesiveness, productivity, and wage dispersion. J. Econ. Behav. Organ. 15:237–55 [Google Scholar]
  73. Lin KH, Tomaskovic-Devey D. 2013. Financialization and US income inequality, 1970–2008. Am. J. Sociol. 118:1284–329 [Google Scholar]
  74. Mahy B, Rycx F, Volral M. 2011. Does wage dispersion make all firms productive?. Scott. J. Polit. Econ. 58:455–89 [Google Scholar]
  75. Medoff J, Abraham K. 1980. Experience, performance, and earnings. Q. J. Econ. 95:703–36 [Google Scholar]
  76. Messersmith JG, Guthrie JP, Ji YY, Lee JY. 2011. Executive turnover: the influence of dispersion and other pay system characteristics. J. Appl. Psychol. 96:457–69 [Google Scholar]
  77. Milkovich GT, Newman JM, Gerhart B. 2011. Compensation New York: McGraw-Hill, 10th ed..
  78. Mitra A, Gupta N, Jenkins GD Jr. 1997. A drop in the bucket: When is a pay raise a pay raise?. J. Organ. Behav. 18:117–37 [Google Scholar]
  79. Mitra A, Tenhiala A, Shaw JD. 2013. Just noticeable differences in pay increases and implied pay reductions. Work. Pap., Univ. North. Iowa, Cedar Falls
  80. Mondello M, Maxcy J. 2009. The impact of salary dispersion and performance bonuses in NFL organizations. Manag. Decis. 47:110–23 [Google Scholar]
  81. Park HY, Ofori-Dankwa J, Bishop DR. 1994. Organizational and environmental determinants of functional and dysfunctional turnover: practical and research implications. Hum. Relat. 47:353–66 [Google Scholar]
  82. Petrescu AI, Simmons R. 2008. Human resource management practices and workers’ job satisfaction. Int. J. Manpow. 29:651–67 [Google Scholar]
  83. Pfeffer J. 1998. Competitive Advantage Through People: Unleashing the Power of the Work Force Cambridge, MA: Harvard Bus. Sch. Press
  84. Pfeffer J, Langton N. 1993. The effect of wage dispersion on satisfaction, productivity, and working collaboratively: evidence from college and university faculty. Adm. Sci. Q. 38:382–407 [Google Scholar]
  85. Powell I, Montgomery M, Cosgrove J. 1994. Compensation structure and establishment quit and fire rates. Ind. Relat. 33:2229–48 [Google Scholar]
  86. Riddell C. 2011. Compensation policy and quit rates: a multilevel approach using benchmarking data. Ind. Relat. 50:4656–77 [Google Scholar]
  87. Rosen S. 1986. Prizes and incentives in elimination tournaments. Am. Econ. Rev. 76:4701–15 [Google Scholar]
  88. San G, Jane WJ. 2008. Wage dispersion and team performance: evidence from the small size professional baseball league in Taiwan. Appl. Econ. Lett. 15:883–86 [Google Scholar]
  89. Shaw JD, Dineen BR, Fang R, Vellella RV. 2009. Employee-organization exchange relationships, HRM practices, and quit rates of good and poor performers. Acad. Manag. J. 52:1016–33 [Google Scholar]
  90. Shaw JD, Gupta N. 2007. Pay system characteristics and quit patterns of good, average, and poor performers. Pers. Psychol. 60:903–28 [Google Scholar]
  91. Shaw JD, Gupta N, Delery JE. 2002. Pay dispersion and workforce performance: moderating effects of incentives and interdependence. Strateg. Manag. J. 23:491–512 [Google Scholar]
  92. Shore TH, Tashchian A, Jourdan L. 2006. Effects of internal and external pay comparisons and work attitudes. J. Appl. Soc. Psychol. 36:2578–98 [Google Scholar]
  93. Siegel PA, Hambrick DC. 2005. Pay disparities within top management groups: evidence of harmful effects on performance of high-technology firms. Organ. Sci. 16:259–74 [Google Scholar]
  94. Simmons R, Berri DJ. 2011. Mixing the princes and the paupers: pay and performance in the National Basketball Association. Labour Econ. 18:381–88 [Google Scholar]
  95. Sojourner A, Mykerezi E, West K. 2013. Teacher pay reform can work: panel data evidence from adoptions of Q-Comp in Minnesota. Work. Pap., Univ. Minnesota, Minneapolis
  96. Sterling C, Smith R, Van de Ven N. 2013. The consequences of benign and malicious envy in the workplace. Presented at Annu. Meet. Acad. Manag., 73rd, Aug. 9–13, Lake Buena Vista, FL
  97. Sunde U. 2009. Heterogeneity and performance in tournaments: a test for incentive effects using professional tennis data. Appl. Econ. 41:3199–208 [Google Scholar]
  98. Sweeney PD, McFarlin DB. 2004. Social comparisons and income satisfaction: a cross-national examination. J. Occup. Organ. Psychol. 77:149–54 [Google Scholar]
  99. Sweeney PD, McFarlin DB. 2005. Wage comparisons with similar and dissimilar others. J. Occup. Organ. Psychol. 78:113–31 [Google Scholar]
  100. Tai K, Narayanan J, McAllister DJ. 2012. Envy as pain: rethinking the nature of envy and its implications for employees and organizations. Acad. Manag. Rev. 37:107–29 [Google Scholar]
  101. Trevor CO, Reilly G, Gerhart B. 2012. Reconsidering pay dispersion’s effect on the performance of interdependent work: reconciling sorting and pay inequality. Acad. Manag. J. 55:585–610 [Google Scholar]
  102. Trevor CO, Wazeter DL. 2006. Contingent view of reactions to objective pay conditions: interdependence among pay structure characteristics and pay relative to internal and external referents. J. Appl. Psychol. 91:1260–75 [Google Scholar]
  103. Tsou MW, Liu JT. 2005. Wage dispersion and employment turnover in Taiwan. Econ. Lett. 88:408–14 [Google Scholar]
  104. Vohs KD, Mead NL, Goode MR. 2009. The psychological consequences of money. Science 314:1154–56 [Google Scholar]
  105. Wade JB, O’Reilly CA, Pollock TG. 2006. Overpaid CEOs and underpaid managers: fairness and executive compensation. Organ. Sci. 17:527–44 [Google Scholar]
  106. Wanberg CR. 2012. The individual experience of unemployment. Annu. Rev. Psychol. 63:369–96 [Google Scholar]
  107. Werner S, Ones D. 2000. Determinants of perceived pay inequities: the effects of comparison other characteristics and pay-system communication. J. Appl. Soc. Psychol. 30:1281–309 [Google Scholar]
  108. Yang H, Klaas BS. 2011. Pay dispersion and the financial performance of the firm: evidence from Korea. Int. J. Hum. Resour. Manag. 22:2147–66 [Google Scholar]
  109. Yglesias M. 2013. Outsource the CEO. Slate, July 1. http://www.slate.com/articles/business/moneybox/2013/07/american_ceo_pay_u_s_executives_are_paid_way_more_than_foreigners.html
/content/journals/10.1146/annurev-orgpsych-031413-091253
Loading
  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error