samantha a. conroy, nina gupta, jason d. shaw and tae-youn … · 2014-08-11 · review is brief,...

A MULTILEVEL APPROACH

TO THE EFFECTS OF PAY

VARIATION

Samantha A. Conroy, Nina Gupta,

Jason D. Shaw and Tae-Youn Park

ABSTRACT

In this paper, we review the literature on pay variation (e.g., pay disper-sion, pay compression, pay range) in organizations. Pay variationresearch has increased markedly in the past two decades and muchprogress has been made in terms of understanding its consequences forindividual, team, and organizational outcomes. Our review of thisresearch exposes several levels-related assumptions that have limitedtheoretical and empirical progress. We isolate the issues that deserveattention, develop an illustrative multilevel model, and offer a number oftestable propositions to guide future research on pay structures.

Keywords: Pay dispersion; wage compression; pay variation; strategicHR; compensation; financial incentives; turnover; organizationalperformance

Research in Personnel and Human Resources Management, Volume 32, 1�64

Copyright r 2014 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 0742-7301/doi:10.1108/S0742-730120140000032001

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http://dx.doi.org/10.1108/S0742-730120140000032001

People in organizations make different amounts of money. These differencescan have substantial impact on their attitudes and behaviors as well as onthe organization’s eventual success. The effects of pay variation have beenthe subject of a substantial body of research, particularly by managementand economics scholars. Although research is plentiful, the knowledgederived from this research remains ambiguous. Theoretical arguments andempirical evidence are contradictory � the relationship is posited and foundto be positive and negative, linear and curvilinear, direct and moderated,and so on. In this article, we endeavor to clarify the issues that lead to thisstate of affairs. In particular, we explicate the levels at which pay variationoperates. Pay variation is by its very nature an aggregate-level construct,but theory and research have used individual-, group-, and organizational-level constructs to address it. We address the etiological dynamics evident atdifferent levels, thereby enabling more targeted research in the future.

This article proceeds as follows. First, we define and clarify the constructof pay variation. We then provide a brief review of the pay variation litera-ture, highlighting some of the critical reasons that ambiguity prevails. Thereview is brief, partly because other reviews already exist (Gupta, Conroy, &Delery, 2012; Shaw, 2014) and partly because of space considerations. Thenext section develops frameworks and propositions appropriate for addres-sing pay variation at the individual, group, and organizational levels. Thelast section addresses other issues that future research must be explicitly cog-nizant of as pay variation is examined in greater depth. In this exposition,we focus primarily on the effects of pay variation because the causes of var-iation are fairly well-understood.

THE CONSTRUCT OF PAY VARIATION

Pay variation refers to the extent to which people in an organization arepaid different amounts of money. A compressed pay structure reflects smalldifferences in pay; a dispersed structure reflects wide variations in pay levels.Pay variation is not a compensation policy per se; rather it is the effect ofcompensation policies an organization embraces. For example, a policy ofmerit pay or seniority-based pay raises will necessarily result in differencesin pay among people. Even if two organizations have the same policy ofmerit pay, one could make large distinctions in pay between good and bademployees and the other only small differences. Alternatively, an organiza-tion which bases the pay system on job evaluation will have some jobs paid

2 SAMANTHA A. CONROY ET AL.

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more than others. Large pay differences between jobs are more consistentwith an elitist pay structure, and small pay differences between jobs aremore consistent with an egalitarian pay structure. Thus, differences in paycould occur for a variety of reasons, and these reasons could create large orsmall differences in pay among employees.

To codify these nuances, Gupta et al. (2012), among others, identifiedthree different kinds of pay variation. Vertical variation concerns pay differ-ences across jobs and is usually job-based (e.g., Devaro, 2006). This typeof variation is evident when the CEO, for example, is paid more thanthe janitor, and when faculty members are paid more than administrativeassistants. Horizontal variation (sometimes referred to as lateral variation)occurs when there are pay differences among people holding the same job(e.g., Shaw, Delery, & Gupta, 2002; Yanadori & Cui, 2013). This typeof variation is evident when, for example, a faculty member with morepublications or more seniority is paid more than a faculty member withfewer publications or lower seniority. Overall variation combines both thesetypes of variation and reflects pay variation across people and across jobs(e.g., Carnahan, Agarwal, & Campbell, 2012). This type of variation can berepresented as the differences in pay between the highest- and lowest-paidemployee, although some research also measures it as the pay differencebetween the highest-paid employee and the average employee pay in theorganization (Walsh, 2008). These different types of variation have differentcauses and consequences, and should be treated as distinct phenomena(Gupta et al., 2012). Unfortunately, much of the thinking and research onpay variation has obscured the differences generalizing and extrapolatingfreely from one type to another. If we are to advance clarity in understand-ing, the distinctions among these types of variation must always be keptin mind.

A major difference in the three types of variations is that they occur fordistinctly different reasons (Downes & Choi, 2014; Gupta et al., 2012;Kepes, Delery, & Gupta, 2009; Shaw, 2014). Horizontal pay variation holdsthe job constant. Differences in pay are, therefore, attributable to individualdifferences, such as differences in qualifications, performance, seniority,political connections, etc. By contrast, vertical pay variation concerns differ-ences in pay across jobs. As such, pay variations are attributable to differ-ences in the internal and external worth of jobs, and to organizationalpolicies about the relative value of internal and external considerations(Milkovich, Newman, & Gerhart, 2014). Overall variation combines boththese sources and incorporates both individual and job considerations.

3A Multilevel Approach to the Effects of Pay Variation

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Because of these fundamentally different etiologies, the impact of pay varia-tions on employee attitudes and behaviors is bound to be different as well.

A levels assumption in pay variation research should be clarified at thispoint. Pay variation is an inherently aggregate construct. To study theeffects of pay variation, then, some variables of interest (e.g., attitudes andindividual reactions) must also be aggregated to that level. A variety of sta-tistical tools are available for appropriate estimation, but the conceptualdistinction between the aggregated and disaggregated phenomena remainssalient. This aggregation issue has mostly been ignored, but it containsimportant questions for the researcher. One, is it reasonable to assume thatemployees react homogeneously to pay variation? Does a high performer,for example, have the same reaction to pay variation as a low performer?Two, what is the aggregation unit? Is it the entire organization or a work-group? If the organization is the aggregation unit, is it reasonable toassume that all workgroups in the organization are treated similarly? Doall supervisors allocate pay to their employees in the same way, or does onemake large distinctions and another make no differentiations? Fig. 1 illus-trates the multiple units for which variations can exist in an organization.For example, it can exist within a workgroup; it can exist for a workforce(e.g., first-line manufacturing workers or truck drivers), and it can exist

WorkforceGroup

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Fig. 1. Levels of Pay Variation.


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across the organization. It is important for researchers to specify the preciseaggregation unit of interest, and to focus theory and research on that levelof aggregation. A number of researchers have highlighted the importanceof these and similar cross-level concerns (e.g., Klein & Kozlowski, 2000;Klein, Tosi, & Cannella, 1999). It is important for pay variation researchersto be vigilant about these issues. As we point out below, this has not alwaysbeen the case.

WHAT DOES THE RESEARCH SAY?

Much of the research on the consequences of pay variation has invokedindividual-level theories. Extrapolations of these individual-level theories toaggregate-level outcomes (such as workforce or organizational perfor-mance) assume that aggregate outcomes parallel individual-level outcomes.Two main theoretical paradigms prevail. One concerns individual motiva-tion and performance, and the other affect and turnover (although some-times motivation arguments are applied to affect and vice versa). Weorganize our assessment of the literature around these paradigms. A listingof empirical studies of pay variation and the critical elements of thesestudies is included in the appendix.

The Motivation/Performance Paradigm

Two major theories are typically used to predict a positive relationshipbetween pay variation and motivation/performance. Tournament theory(Lazear & Rosen, 1981) proposes that people work hard to win prizes thatare fixed in advance. As Gupta et al. (2012) point out, tournament theoryis best applied to vertical variation, that is, the size of pay differencesbetween the current job and the next higher-level job, but it is ofteninvoked to explain horizontal variation as well. Pay variations amongpeople due to differences in merit or seniority have some but not all of theelements entailed in tournament formats. According to tournament theory,tournament wins are not based on absolute performance, but on relativeperformance, that is, how well an employee fares relative to peers, and thetournament prize is the pay raise associated with the win. Winning meansthe employee was the best performer in the comparison group. Accordingto the theory, employees compete in a sequential elimination tournament


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with the winners promoted to the next level and to begin a competitionat the new level for the next prize (Lazear & Rosen, 1981). Two factorsaffect the incentive value of the tournament � the size of the pay differen-tial, and the probability of winning the tournament (Audas, Barmby, &Treble, 2004; Lazear & Rosen, 1981). Because larger prizes are presumablymore motivating, tournament theory implies a positive relationshipbetween pay variation and workforce performance.

Many studies support this proposition, particularly in sports settingssuch as golf (Ehrenberg & Bognanno, 1990a, 1990b), auto racing (Becker &Huselid, 1992), and basketball (Frick, Prinz, & Winkleman, 2003;Simmons & Berri, 2011). One study did not find a positive relationship in abasketball sample (Katayama & Nuch, 2011), while others reported nega-tive relationships between pay variation and performance in baseball andfootball settings (Bloom, 1999; Frick et al., 2003; Jewell & Molina, 2004).

In non-sports, organizational settings, positive relationships betweenvertical pay variation and performance were observed among executives inthe United States (Main, O’Reilly, & Wade, 1993), Denmark (Eriksson,1999), Israel (Ang, Hauser, & Lautenberg, 1998), and China (Firth, Leung, &Rui, 2010). Positive relationships were also observed between overall varia-tion and performance in the United States (Lee, Lev, & Yeo, 2008), Sweden(Heyman, 2005; Hibbs & Locking, 2000), Taiwan (Liu, Tsou, & Wang, 2010),and Belgium (Lallemand, Plasman, & Rycx, 2004). Interestingly, this positiverelationship was not observed in non-sports samples when horizontal ratherthan vertical variation was of interest (see Jirjahn & Kraft, 2007, for a rareexception in a sample of German organizations).

Much of this research concerned the main effects of pay variation, but afew studies explored moderators as well. Kale, Reis, and Venkateswaran(2009) focused on the moderating effect of the probability of getting theprize. A positive relationship between vertical pay variation and firm finan-cial performance among US executives was moderated by opportunities forpromotion. Specifically, the relationship was stronger when the CEO wasnear retirement, and weaker when the CEO was new or was an outsider.All three of these factors are indicators of the likelihood that an internalpromotion would soon occur, suggesting that promotion opportunitymoderates the relationship of vertical pay variation to firm performancerelationship.

In all, research on tournament theory offers mixed support for tourna-ment effects. There is some support when the theory is applied to verticalvariation, but the picture is conflicting when the theory is applied to verti-cal variation in sports settings. Positive effects also tend to be more


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consistent when firm (i.e., the success of the entire organization) ratherthan workforce performance (i.e., success of a subset, such as a specific or acore workforce within the firm) is the criterion of interest. Many studies ofexecutive pay variation and performance that show a positive relationshipuse financial performance measures as the dependent variable (e.g., Firthet al., 2010; Lallemand et al., 2004; Lee et al., 2008; Main et al., 1993).

From a psychological perspective, the theory most often invoked topredict a positive relationship between pay variation and performance isexpectancy theory (Lawler, 1973; Vroom, 1964). This theory concerns judg-ments about situational dynamics and is most commonly applied to predictthe effects of horizontal variation on human behavior. Expectancy theoristsargue that motivation results from the interplay among three factors. One,Effort→Performance expectancy or E→P expectancy is the probability anemployee sees that a given level of effort will lead to a given performancelevel. Two, Performance→Outcome expectancy or P→O expectancy (alsocalled instrumentality) concerns the probability an employee sees that agiven level of performance will lead to a given outcome. Many outcomescan be associated with performance (pay raise, social liking, feelingsof accomplishment, etc.), such that numerous P→O expectancies can beidentified. Because pay is the only outcome relevant to our discussion, weconsider only P→Pay expectancy here. Three, valence represents the valuean employee places on a given outcome (and, for our purpose, the value anemployee places on pay). For an employee to be motivated to perform, allthree of these elements must be strong. That is, the employee must perceivea reasonable likelihood that he/she can do the job, perceive a reasonablelikelihood that doing the job will lead to better pay, and the employee mustvalue pay. Expectancy theory is actually a choice theory for within-subjectspredictions (i.e., an employee’s choice between multiple effort levels), butit is commonly applied to make between-subjects predictions as well(Pinder, 1998).

Kepes et al. (2009) reported the strongest explicit test of expectancytheory in the pay variation literature. Their study demonstrated that thebasis of pay variation is a critical moderator of the relationship betweenhorizontal variation and workforce performance. The test is explicit in thesense that expectancy theory suggests that it is only performance-basedpay variation, not pay variation in its totality, which leads to higher perfor-mance. This study represents consistency between theoretical and empiricalapproaches, since expectancy theory is most applicable to horizontalvariation (Gupta et al., 2012). The study also pointed to the potentiallynegative effects of politically based pay variation. These results highlight


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the possibility that mixed results across studies could be attributable to theomission of the basis of pay variation, since performance-based variationaffected performance differently from politically based pay variation. Thisidea is further confirmed in the work of Shaw et al. (2002), who found, ingeneral, that horizontal pay dispersion was positively related to perfor-mance only when the dispersion was performance-based (see also, Trevor,Reilly, & Gerhart, 2012).

That the basis of pay variation (performance or nonperformance) iscritical is also evident when we examine mixed results across studies. Forexample, Simmons and Berri (2011) reported a positive relationship betweenpay variation and team performance among National BasketballAssociation (NBA) teams, whereas Katayama and Nuch (2011) (also look-ing at NBA teams) found no support for any relationship, positive or nega-tive. These studies were published in the same year, focused on the samesetting, yet the results conflict. A closer examination reveals that Simmonsand Berri studied justified pay variation (i.e., the variation was that basedon “observable player skills and attributes,” 2011, p. 383), whereasKatayama and Nuch (2011) statistically controlled for average salary(a proxy for talent and individual performance). This perspective aligns theresults of the two studies. The essential lesson is that performance-relatedvariation (the Simmons and Berri study) is positively related to perfor-mance, whereas random or unexplained pay variation (the Katayama andNuch study) is unrelated to performance. As noted above, expectancytheory does not suggest that nonperformance-based pay would lead tohigher performance.

Gerhart and Rynes (2003) raised this concern explicitly over ten yearsago. They argued that many studies control for performance, input, talent,previous pay, etc., in their statistical tests. In effect, the use of these controlsremoves performance-based pay variation from the predictor, leaving onlythe variance due to unexplained factors in the equation. Studies using suchcontrols (e.g., Bloom, 1999; Pfeffer & Langton, 1993) should be interpretedas studies of nonperformance-based pay variation. Neither the absence of arelationship nor a negative relationship between nonperformance variationand performance is surprising. No theory � not tournament, not expec-tancy, not equity, not any other � predicts a positive relationship betweenunexplained pay variation and performance.

In sum, expectancy theory-based research supports a positive relation-ship between performance-based horizontal pay variation and workforceperformance in sports (Trevor et al., 2012) and non-sports (Kepes et al.,2009; Shaw et al., 2002) settings. This research shows theoretical/empirical


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consistency, and it is particularly useful in highlighting the importance ofincorporating the basis of pay variations into our theoretical and statisticalframeworks.

The Affect/Turnover Paradigm

This paradigm assumes that pay variation has a negative effect on affect(primarily satisfaction), and that affect in turn influences turnover.Although debate continues on the relationship between satisfaction and per-formance, this paradigm is often extended from affect to predict a negativerelationship between pay variations and both workforce and organizationalperformance. Two related theories � relative deprivation theory and equitytheory � are typically invoked within this paradigm.

Based on social comparison theory (Festinger, 1954), relative deprivationtheory posits that attitudes depend on relative rather than absolute out-comes (Crosby, 1976; Sweeney, McFarlin, & Inderrieden, 1990). The theoryargues that people feel relatively deprived when their outcomes fall short incomparison to others. Relative deprivation engenders both positive andnegative cognitions, emotions, and behaviors, including feelings of stressand efforts at self-improvement, depending on how much control one feelsover changing the circumstances (Crosby, 1976). Pay variation researchadopting this perspective typically dwells almost entirely on the negativeoutcomes, without considering that in certain conditions (i.e., control andopportunity), positive outcomes are possible. Instead, applications of rela-tive deprivation theory ignore these positive applications. Levine (1993)reported that employees in similar jobs who had low-wage residuals (com-pared to expected wages) had lower satisfaction levels and were more likelyto quit. In this context, it is interesting to note that relatively higher wagesalso caused discomfort among employees in Japan � a potential boundarycondition.

Equity theory (Adams, 1963, 1965) also emphasizes social comparisons.According to equity theory, individuals compare their inputs (e.g., ability,effort) and their outcomes (e.g., pay, benefits) with those of comparisonothers. Mental outcome/input ratios for self and others are compared, andinequity and discomfort are experienced when the ratios are not in balance.Inequity perceptions in turn lead to behavioral, attitudinal, and cognitiveadjustments including changes in inputs or outcomes or leaving the field,that is, turnover. Typically, inequity effects are stronger for under-rewardthan over-reward conditions (Lawler, 1971).


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Equity arguments are often used in within-organization comparisons,but Cowherd and Levine (1992) incorporated external labor market paydifferentials in their application of equity theory to pay variation. Theirkey finding was that, among hourly and lower level employees, pay equitywas positively related to product quality. More recently, Trevor andWazeter (2006) reported a negative relationship between pay variation andequity perceptions among lower-paid employees.

Equity arguments have also been used to explain the relationship ofvertical and overall variation to outcomes. In one study, vertical inequity,that is, underpayment compared to the CEO, was associated with greaterturnover in a US managerial sample (Wade, O’Reilly, & Pollock, 2006).Bloom and Michel (2002) and Messersmith, Guthrie, Ji, and Lee (2011)also reported positive pay variation�turnover relationships among USmanagers and executives respectively. Given these results, Shaw (2014) con-cluded that vertical pay variation is positively related to turnover, but thatthis type of conclusion was less clear for horizontal pay variation. Researchshows, for example, that high performers are less likely to leave the organi-zation when pay is varied, but this was not true of low performers (Shaw &Gupta, 2007).

Several points are relevant in summarizing the research from thisparadigm. One, there is some support for a positive relationship betweenpay variation and turnover, especially among low performers (Shaw, 2014).Two, the evidence is too ambiguous to make definitive conclusions aboutthe nature of this relationship, especially for horizontal pay variation.Three, almost all the research from this perspective has ignored the roleof inputs, a key component of the theoretical framework. Rather, mostarguments assume equivalence of inputs, an assumption that is highlyproblematic.

Understanding Levels Issues

Research on pay variation raises many concerns about the levels at whichphenomena occur and the levels at which they are studied. We addressseveral of these issues below.

InterdependenceThe four theories discussed above are individual-level theories. Eachexplains how individuals, not aggregates, respond to individual or aggregatephenomena. But the application of these theories spans levels. In particular,


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task or goal interdependence has emerged as significant (Levine, 1991).Interdependence operates at a different level than individual responses.That is, interdependence is a contextual variable that describes the taskenvironment. It can be a group level variable (within-unit task interdepen-dence) or a firm-level variable (between-group interdependence).

The logic invoked in interdependence applications is as follows. On theone hand, when work is interdependent, cooperation and collaboration areessential, and large pay disparities among group members could be detri-mental, assuming these pay disparities create inequity. On the other hand,competition among group members could be beneficial when work is inde-pendent, and large pay variations are instrumental in gaining this benefit.

The moderating role of interdependence is this context has intuitiveappeal, but the evidence is mixed. In studies of executive compensation,interdependence was not a significant moderator of the vertical payvariation�firm performance relationship (Eriksson, 1999; Main et al.,1993). These studies used somewhat poor proxies for interdependence (theproportion of profit center heads on the executive team). Lack of empiricalsupport may be attributable to this measurement issue. With a differentapproach, Siegel and Hambrick (2005) suggested that technological inten-sity increases the need for collaboration. The hypothesized interactionbetween pay variation and technological intensity in explaining firm perfor-mance was supported for all three types of variation (vertical, horizontal,and overall) among Top Management Teams (TMTs). The relationship ofpay variation to firm performance was negative for technologically intensefirms (i.e., those requiring greater collaboration) while there was no rela-tionship in low technology firms. On a related issue, Ensley, Pearson, andSardeshmukh (2007) tested mediating paths of team processes in explaininga negative relationship between pay variation and firm performance, using asample of high-growth firm TMTs. The authors concluded that the negativeinfluence of pay variation occurred through team potency, cohesion, affec-tive conflict, and cognitive conflict.

Looking across sports samples provides some validation of the moderat-ing role of interdependence. The pay variation�performance relationshipwas positive in golf (Ehrenberg & Bognanno, 1990a, 1990b) and auto racing(Becker & Huselid, 1992), but was negative in baseball (Bloom, 1999;Depken, 2000; Gee & Wen-Jhan, 2008; Jewell & Molina, 2004; San & Jane,2008), football (Mondello & Maxcy, 2009), and hockey (Gomez, 2002;Sommers, 1998) settings. Golf and auto racing are essentially individualsports with little need for interdependence, whereas baseball, football, andhockey are team sports necessitating cooperation. Trevor et al. (2012)


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addressed the issue of input-related pay variation for interdependent sportsteams, finding team performance was negatively affected by pay variationonly when the variation was unexplained, that is, non-input-based.

Shaw et al. (2002) specifically explored this issue in a non-sports setting.They hypothesized, and found, that interdependence affects the nature ofthe horizontal pay variation�workforce performance relationship. In asample of employees who worked somewhat independently (truck drivers),the relationship was positive. But, in a sample of employees whose workentailed more interdependence (concrete pipe production workers), theresults were ambiguous and did not support the hypothesized moderatingeffects of interdependence.

In sum, theory suggests that interdependence (an aggregate construct)moderates the pay variation�outcomes relationship. Empirical researchhas provided some evidence in support of this notion, although the resultshave not been uniform. Research on pay variation has virtually ignored thecomplexity of levels issues when addressing interdependence, which canoccur both within and between groups. We encourage future research toremedy this oversight.

Predictor HomogeneityMost studies assume a single value for pay variation across the organiza-tion. There is, of course, only a single value for an organization’s overallvariation (i.e., the range between the highest-paid employee and lowestpaid employee), but subsets of overall variation can also exist. Should over-all variation be addressed at the corporate or facility level? The possibilitythat some facilities, plants, or subdivisions in a company have dispersed,and other facilities have compressed, pay structures cannot be overlooked.These differences in variation estimates within organizations could hold asignificant key to understanding the effects of variation. Vertical variationcan also vary substantially. For example, the size of variations betweenjobs could increase as one ascends the organizational ladder (as tourna-ment theory would suggest, Eriksson, 1999; Lazear & Rosen, 1981), or theorganization may have a break point above which variations are large andbelow which variations are small. The assumption of homogeneity is notnecessarily warranted. The issue of homogeneity is especially thorny withhorizontal variation. To illustrate, there are likely to be as many differentvalues for variation as there are jobs (see Fig. 1). The degree of pay varia-tion for production employees, for example, could be vastly different fromthe degree of variation among TMT members.


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Many studies of horizontal variation obviate this issue by studying onlya single employee group (e.g., truck drivers [Kepes et al., 2009; Shaw et al.,2002] or athletes [Trevor et al., 2012]). This approach has merit when out-comes are studied at the same level (i.e., the performance of that workforce),but when the criterion of interest is at a different level (e.g., overall organi-zational performance), the problem remains. Is organizational performancemore affected by the compressed pay structure of one group (e.g., produc-tion employees), or the dispersed pay structure of another group (e.g., topexecutives)? Are observed effects due to the variation in the group underinvestigation, or are they attributable to variations in another employeegroup?

Even within a defined workforce, there are variations in pay variation(see Fig. 1). Employment relationships often have considerable variationbetween supervisors or teams within organizations (Jia, Shaw, Tsui, &Park, 2013). The production employee workforce reports to many differentsupervisors, truck drivers are coordinated through many dispatchers, andso on. Each of the supervisors or dispatchers may adopt differing pay allo-cation policies. Even when the organization uses performance-based pay,one supervisor could make much bigger distinctions based on performancethan another. Pay variation is then varied across workgroups. For example,Park (2012) reported differences in allocation decisions depending on theregulatory focus of the allocator. Confounding the situation further, themerit pay pool could be allocated to supervisors based on group perfor-mance. The size of the pool as well as the allocation rules could thus varywithin the same workforce.

In short, there are many different values possible for pay variation in anorganization. There are vertical and horizontal variations within organiza-tions. There is variation at the firm level (e.g., horizontal variation across anentire class of jobs), at the workforce level (e.g., horizontal variations withina class of jobs in a workforce), and at the group level (e.g., horizontal varia-tions in a team). Not all these issues can be examined in a single study. Butheightened awareness of the inherent complexity of pay variation can clarifyour thinking.

Homogeneity of EmployeesAnother common assumption in pay variation research is that all employeesreact similarly to pay variation, and that a degree of pay variation is eithergood and leads to positive outcomes, or it is bad and leads to negative out-comes. But employees are not all the same, and application of individual-level theories to aggregate reactions is problematic. Pay variation research


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includes evidence that personality and cultural differences influenceperceptions of fairness regarding the size of pay differences. For example, ina sample of Australian managers, Orlitzky, Swanson, and Quartermaine(2006) found that agreeableness was negatively related to normative myopia(a tendency to ignore ethical issues), which in turn was related to preferencesfor highly differentiated pay structures. Increases in similar preferences werealso reported by He, Chen, and Zhang (2004), who argued that Chineseemployees may be adopting more Western cultural values as a result ofownership reform in China. Beyond personality and cultural influences,there are also marked differences in ability and values among employees.Some people are more talented than others; some people value money morethan others. These things are explicit components of individual-leveltheories. Equity theory gives great weight to inputs; expectancy theoryincorporates ability into the E→P component, and preferences into thevalence component. In aggregate applications, these components areignored when the assumption of homogeneity is adopted.

There is also evidence that employees react differently depending on theirrelative standing within an aggregate. For example, Trevor and Wazeter(2006) reported that employees low in pay standing evinced a negative rela-tionship between pay variation and equity perceptions, whereas the relation-ship was slightly positive among employees high in pay standing. Petrescuand Simmons (2008) also reported lower pay satisfaction and lower jobsatisfaction when the overall pay gap was perceived to be too large.

An explicit demonstration of the heterogeneity in reactions comes fromShaw and Gupta (2007). High levels of horizontal performance-basedpay variations were related to lower turnover among high performers, butaverage performers had lower quit rates when the pay variation wasseniority-based rather than performance-based. The quit rates of low per-formers were unrelated to pay variation. Based on this study, it is reason-able to conclude that large performance-based distinctions may beparticularly beneficial in simultaneously promoting retention among goodperformers and turnover among poor performers. In any event, this studycertainly cautions against the homogeneity assumption.

Homogeneity of CriteriaIn developing their theoretical frameworks, many scholars extrapolateseamlessly across criteria. For example, results obtained for workforceperformance are used to support predictions about organizational financialperformance, and results about performance are applied to predictionsabout turnover. But all outcomes are not equal.


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Horizontal variation in pay within a specific employee workforce is mostpredictive of the performance of that workforce. Overall organizationalperformance, as we argued above, is affected by many factors includingdegrees of pay variations among other employee groups within thesame organization. In other words, without additional cross-level theory,predictions within the same level of aggregation make much more sensethan predictions to higher aggregation levels.

Furthermore, the motivation/performance paradigm is different fromthe affect/turnover paradigm, but both paradigms operate simultaneously.It is quite possible that performance-based pay variations both motivatehigh performance and erode collaboration within the same workforce atthe same time. The interplay between performance outcomes and turnoveroutcomes at the workforce level will affect the ultimate relationshipbetween pay variation and organizational performance. How important isindividual performance? How important is collaboration among employ-ees? Situational contingencies determine the answers to these questions,and it is only these answers that can illuminate whether organizationalperformance benefits or suffers. Alternatively, if performance-based payvariation reduces turnover among high performers and increases turnoveramong poor performers, does organizational performance improve or dete-riorate? Turnover is expensive, and the relative financial cost of turnovermust be assessed against the relative financial gain from high performanceto answer this question.

Summary

Pay variation research has moved beyond infancy, and it is importantto move beyond studying its main effects. A critical examination of theliterature shows the value of distinguishing among different kinds of payvariation and of incorporating the basis of pay differences as an integralcomponent of any framework. In addition, this critical examination raisesmany issues about the level at which theoretical and empirical work isaddressed.

Many of the issues raised by levels theorists are of concern in past payvariation research. For example, Klein et al. noted that the specification ofconstruct levels is critical and must occur with “care and precision” (1999,p. 244), yet pay variation researchers tend to theorize at one level and opera-tionalize variables at another. Similarly, heterogeneity at the individual levelmay be meaningful to predicting outcomes at the group and organization


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level (Klein & Kozlowski, 2000; Klein et al., 1999), yet this rarely gets atten-tion. Most work stays focused at the individual or organization level, yetthe group level is also important (Klein et al., 1999). Attention to levels con-cerns is likely to provide much-needed clarity in understanding the effects ofpay variation.

AN ILLUSTRATIVE MULTILEVEL APPROACH

Based on the foregoing discussion, a multilevel approach to understandingthe effects of pay variation is desirable. We begin to develop such anapproach next. The treatment below is illustrative, not exhaustive, primarilybecause our intent is to highlight complexities as we move across levels, andsecondarily because space considerations preclude an exhaustive approach.We therefore constrain our attention within certain boundaries and withsome assumptions. These are detailed first.

To begin with, we focus specifically on horizontal variation. Withhorizontal variation, jobs are held constant, and variations in pay areattributable to individual differences in skill, performance, seniority, etc.(Gupta et al., 2012). It is true that some workgroups include individualsholding different jobs (Hollenbeck, Beersma, & Shouton, 2012), but suchworkgroups would not fall within our purview, since our focus is limited topeople holding the same job. We focus primarily on horizontal variation forseveral reasons. One, as noted, horizontal variation keeps jobs constant, fos-tering a clear focus on human resource dynamics. Vertical variations arelikely to be influenced by labor market considerations to a large extent(Fulmer, 2009), which are less controlled by human resource policies.Two, these individually based reasons arguably have stronger effects onemployees than job-based effects. Three, most explanatory theories of payvariation, whether they address vertical, horizontal, or overall variation,are focused on individual-level explanations. Four, using only one type ofvariation makes our task much more manageable.

Second, we concern ourselves only with performance-based pay varia-tion. This decision was made for two main reasons. One, most past researchhas assumed, at least implicitly, that pay variation is performance-based(Shaw, 2014). We make this assumption explicit, as some of the previousresearch has done (Kepes et al., 2009; Shaw & Gupta, 2007; Shaw et al.,2002; Trevor et al., 2012). Two, a focus on performance-based variationenables us to build on work concerning performance-based pay in general,


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which is a well-developed field (Gerhart, Rynes, & Fulmer, 2009). Thisconstraint means that seniority-based, politics-based, skill-based, and otherforms of variation are outside the bailiwick. We hope other scholars focuson those forms. Performance-based pay can take many forms � piece-ratepay, merit pay, spot bonuses, gainsharing, and profit-sharing, to name but afew (Gerhart & Rynes, 2003). Performance-based pay can occur at the indi-vidual level, the group level, and at the organizational level, as alternativesor simultaneously at all levels. For example, merit pay is typically individu-ally based, whereas profit-sharing is organizationally based. An organiza-tion could have either or both forms at one time. These variations in theforms of performance-based pay are relevant in this discussion.

Thus, our exposition is limited to performance-based horizontal pay var-iations in an organization. Horizontal pay variations could occur at differ-ent levels (for an illustration of organizational nesting patterns, see Fig. 1).For example, pay variations could be based on individual or workgroupperformance. Pay allocations could be made at the individual or the grouplevel as well. These differences mean, for example, that the firm level of payvariation could be the same across firms while the workgroup levels of payvariation differ significantly within and between firms. That is, all membersof a group could receive the same amount, or the pay amounts could be tai-lored to match the differential performance of group members. Downesand Choi (2014, p. 57) suggested that performance-based pay variation wasstatistically “equal to the overlap between variance in individual perfor-mance and variance in individual pay.” This is true for individual-levelperformance-based pay, but not necessarily for group performance-basedpay, since group rewards may be shared equally by all group members. Insystems using merit pay, it is not unusual for individual supervisors to havediscretion in allocating pay to subordinates (Heneman & Werner, 2005).Some managers are likely to make large differentiations among groupmembers, while other managers minimize these differentiations (Orlitzkyet al., 2006). Both decisions involve performance-based pay (since the sizeof the merit pool coincides with group performance), but they implydifferent degrees of variation across work groups. These workgroup-levelvariations are qualitatively different from organizational-level variations.To address this issue, we use group-level allocation rules within our frame-work. An allocation rule is a “social rule which specified criteria that definecertain distributions of rewards and resources” (Leventhal, 1976, p. 94). Anequity allocation rule is the distribution of rewards according to the contri-bution (performance) of each member, and an equality allocation rule is thedistribution of rewards as equal shares to each member. This means that,


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given the same degree of organizational-level performance-based pay varia-tion, individuals in different groups actually experience different degreesof variation. Fig. 2 contains a visual depiction of this phenomenon. In thisfigure, pay variation refers to organizational-level horizontal performance-based pay differences, and allocation rules refer to whether pay is distribu-ted equally or equitably across group members. This distinction is oftenoverlooked in the pay variation literature, but is critical to our exposition.

With these constraints and clarifications in place, we can proceed withour illustrative multilevel approach to pay variation. The basic theoreticalapproach is presented graphically in Fig. 3. The figure depicts the linkagesexpected at the individual, group, and organizational levels, and it showscross-level linkages as well. In this figure, and in the subsequent exposition,we focus on motivation/performance and affect/turnover for the workforce.The relationship of these workforce outcomes to organizational outcomesis discussed separately. We address factors that may influence outcomes ofpay variation at each level. Following the propositions, we explore pastresearch as it applies to the propositions. This allows, not only a

WorkforceGroup

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Fig. 2. Organization-Level Pay Variation and Group-Level Allocation Rules.


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Within- & Between-group Task

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of WorkforcePerformance

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Fig. 3. An Illustration of Multilevel Factors Influencing the Pay Variation and Performance Relationship.

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demonstration of the value of the propositions in explaining past research,but also an identification of areas where further work is clearly needed.

Pay Variation and Outcomes at the Individual Level

As noted above, two basic paradigms account for much of pay variationresearch. We address each of these paradigms in turn.

The Motivation/Performance ParadigmThis paradigm typically depicts the relationship to be as follows:

Pay Variation → Motivation → Individual Performance

As we explained, this depiction is too simplistic, and several refinementsare in order. First of all, the paradigm should NOT be applied to pay varia-tion in its entirety, but only to horizontal performance-based pay variation.In addition, several moderators are relevant. Expectancy theory incorpo-rates three factors � E→P expectancy, P→O expectancy, and Valence.Thus, motivation should be higher when E→P expectancy is higher. Thismeans, for example, that employees with higher ability should have highermotivation, all else equal, but this element hardly ever receives explicitrecognition in pay variation research. In addition, motivation should behigher when P→Pay expectancy is higher, all else equal. Not allperformance-based systems are equivalent, however. For example, there is amuch clearer link between performance and pay in a piece-rate pay systemthan in merit pay systems or profit-sharing systems (all forms ofperformance-based pay). The P→Pay expectancies will vary considerablyacross performance-based pay systems, and the type of pay system is afurther moderator. Most pay variation research ignores this issue as well.The third element refers to how much employees value pay. Employees witha higher pay valence should have higher motivation levels, all else equal.Using the expectancy paradigm, then, three sets of moderators emergeimmediately � individual ability, individual preferences for pay, and thetype of performance-based pay system.

Furthermore, allocation rules should also affect P→Pay expectancies.Employees under individual pay-for-performance plans would, of coursehave clear P→Pay expectancies (but these can vary, depending on thespecific performance-based pay system). For example, Schwab (1973)reported stronger P→Pay links under individual piece-rate pay plans thanunder group performance-based pay plans. But employees under group


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performance-based pay plans (i.e., plans where pay pools are determinedbased on group performance) should have different P→Pay expectanciesdepending on the allocation rules. Equity allocation rules should lead tohigher P→Pay expectancies than equality allocation rules, as the linkbetween an individual’s own performance and his/her pay is clearer underequity than under equality rules. Supporting this argument, Pearsall,Christian, and Ellis (2010) reported that group incentives that included anindividual component (i.e., there was some level of equity allocation) led tobetter performance than did group incentives without an individualcomponent.

These arguments suggest that the relationship between pay variationand individual motivation/performance is likely to be positive under equityrules. This positive relationship should be strengthened when pay variationis greater because larger pay distinctions are made between good and badperformers. That is, the reward intensity is greater. In short, we offer thefollowing propositions on the relationship of performance-based horizontalvariation and individual motivation/performance. All else equal,

Proposition 1. The positive relationship between pay variation and indi-vidual motivation/performance is stronger among employees with higherability than employees with lower ability.

Proposition 2. The positive relationship between pay variation and indi-vidual motivation/performance is stronger among employees with highervalences for pay than employees with lower valences for pay.

Proposition 3. The positive relationship between pay variation and indi-vidual motivation/performance is stronger when the performance-basedpay system provides clearer linkages between performance and pay thanwhen the performance-based pay system provides more ambiguous lin-kages between performance and pay.

Proposition 4. The positive relationship between pay variation and indi-vidual motivation/performance is stronger when equity rather thanequality allocation rules are used.

Relevant ResearchA review of the pay variation literature addressing individual responsesprovides preliminary support for these propositions in both experimentaland nonexperimental studies. In experimental research, the importance of


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the performance→pay linkage is supported by Harbring and Irlenbusch(2003), who found that student participants choose higher effort levelswhen more prizes were available than when fewer prizes were available; inlater work, Harbring and Luenser (2008) reported that larger wage spreadsincreased both individual effort and performance. Ability played a signifi-cant role in this study: participants in the high ability condition chosehigher effort levels when pay was more dispersed than when it was morecompressed. In another experiment, individual effort levels selected tendedto be higher when allocators were allowed to vary wages than when theycould not vary wages. This comparison reflects individual motivationalresponses to equity versus equality allocation rules (Abeler, Kube,Altmann, & Wibral, 2010).

Interpretation is more complex in nonexperimental research. In macrofield research, scholars often use numerous statistical controls that poten-tially cloud interpretation (Gerhart & Rynes, 2003). Many field studies ofpay variation also focus on the entirety of variation, rather thanperformance-based pay variation alone. When only those studies that focuson performance-based pay variation in some way (that is, those thatinclude the performance basis explicitly) are considered, a consistent pat-tern emerges suggesting increased individual effort and performance as payvariation increases (Becker & Huselid, 1992; Ehrenberg & Bognanno,1990a, 1990b; Simmons & Berri, 2011).

This work provides initial support for the above propositions. The con-clusion must be tempered, however in light of three considerations. One,the experimental work considered intended rather than actual effort. Two,nonexperimental work used a miscellany of controls inconsistently acrossstudies, leading to ambiguity. Three, both experimental and nonexperimen-tal work ignored the issue of valence.

The Affect/Turnover ParadigmThe general approach this paradigm has taken can be depicted as follows:

Pay Variation → Dissatisfaction → Turnover

Again, we argue that this is too simplistic. Individual-level theoreticalmodels of turnover can be quite complex (e.g., Lee & Mitchell’s unfoldingmodel of turnover, 1994; Jackofsky, 1984). It is beyond the scope of thispaper to explicate the intricacies of turnover. Instead, we focus mainly onturnover in relation to pay variation. Beyond the caveats of restricting thepredictions to horizontal performance-based pay variation, we exploreadditional nuances in the pay variation and turnover relationship.


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The affective variable usually implied as the mediator in this paradigm ispay satisfaction. Pay satisfaction is defined as the “amount of overall posi-tive or negative affect (or feelings) that individuals have toward their pay”(Miceli & Lane, 1991, p. 246; Williams, McDaniel, & Nguyen, 2006). Paysatisfaction is influenced by many things (Williams et al., 2006). Of these,pay level and pay comparison are particularly germane to the pay variationcontext.

When performance-based pay variations are great, pay levels of goodperformers should be higher and pay levels of poor performers should becommensurately lower than when pay is compressed. Social comparisonsaffect people’s assessments of their outcomes (Buunk & Gibbons, 2007;Festinger, 1954), and those higher in standing compared to others shouldreact better. This means that those receiving higher pay (the good perfor-mers) are more satisfied than those lower in standing (the poor performers),both in terms of their absolute pay (i.e., pay level) and in terms of theirrelative pay (i.e., social comparison). Indeed, earned pay tends to evokestronger reactions than money, partly because of the symbolic connotationof success (Devoe, Pfeffer, &, Lee, 2013).

As a result, pay variations should interact with relative standing toexplain satisfaction. As pay variation increases, those with higher payshould feel more satisfied and those with lower pay should feel less satisfied(Crosby, 1976; Sweeney et al., 1990). In one of the earlier works on payvariation, Pfeffer and Langton (1993) found that those at the lower end ofthe pay distribution were dissatisfied when pay variation was large. Trevorand Wazeter (2006) reported similar results more recently. Extending thisidea from satisfaction to turnover, Carnahan et al. (2012) reported thathighly paid employees were less likely to leave the organization in highthan in low pay variation settings.

The situation becomes at the same time more complex and clearer whenallocation rules are factored into the equation. Under equity rules, highperformers are paid more than low performers (individual performance isconsidered one of the most relevant inputs in equity assessments, Werner &Ones, 2000). Under equality rules, however, this is not the case. In otherwords, we should expect stronger effects on satisfaction under equity thanequality rules.

A further factor is the homogeneity of performance among group mem-bers. If group members have similar performance levels, the differences inpay between equity and equality rules would be minimal. When perfor-mance levels among group members are varied, however, the differencesbetween the two become more marked and therefore more salient. In


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groups with heterogeneous performance, high performers are increasinglydissatisfied under equality rules. On the other hand, low performers tend tooverestimate their performance (Harrison & Shaffer, 1994; Kruger &Dunning, 1999) and would not experience inequity. In short, the organiza-tion will be faced with the difficulty of high performers leaving and low per-formers staying. Essentially, pay variations can “push” different employeesto leave due to dissatisfaction with the organization depending to the allo-cation approach being used.

These arguments lead to the following propositions. All else equal,

Proposition 5. High performers are more satisfied with pay variationunder equity than equality rules; this effect is intensified when groupmember performance levels are heterogeneous.

Proposition 6. Low performers are more satisfied with pay variationunder equality than equity rules; this effect is intensified when groupmember performance levels are heterogeneous.

Relevant ResearchResearch addressing responses of high or low performers at the individuallevel is uncommon in pay variation research; rather, as described earlier,many of the studies consider an individual’s location in the pay hierarchyonly (e.g., Carnahan et al., 2012; Pfeffer & Langton, 1993; Trevor &Wazeter, 2006). Assuming location in the hierarchy is representative of per-formance, this work supports the proposition that high performers aremore satisfied and low performers are less satisfied with high levels of payvariation. Although this was not an individual-level study, Shaw andGupta (2007) did make distinctions among the types of performers. Theypredicted and found that high performers were less likely to leave firmswith highly communicated, performance-based pay variation. One studyaddressing individual preferences offers preliminary evidence. Based on theresults of a policy-capturing study, Blume, Baldwin, and Rubin (2009)reported that individuals higher in cognitive ability were more attracted topay systems that created greater pay differentiation.

We could not locate any study of individual satisfaction that addressedthe equity/equality distinction in allocation rules, or that explored the mod-erating role of group member contribution homogeneity, in the context ofpay variation. This omission makes these issues ripe targets for futureresearch.


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Pay Variation and Outcomes at the Group Level

In this section, we focus on the effects of pay variation at the workgrouplevel. Past research has typically either ignored this level entirely, or it hasassumed that individual reactions can simply be aggregated to the grouplevel. Beyond the problems in aggregation, additional concerns pervade theinterplay between pay variation and group dynamics.

This explication draws on the work of Ployhart and Moliterno (2011) onthe emergence of human capital resources to explain competitive advantagethrough people. Pay variation is a human resource (HR) policy outcomethat can potentially promote competitive advantage through people. Thus,Ployhart and Moliterno’s (2011) approach, and particularly two constructsin their approach, are germane. One is emergence-enabling states, that is,“the unit’s behavioral processes, cognitive mechanisms, and affective psy-chological states,” and the other is task environment complexity, that is,“the degree to which the unit’s tasks require interdependence and coordina-tion among members” (Ployhart & Moliterno, 2011, p. 135, emphasesadded). We draw on these two concepts as important mechanisms in payvariation’s effects at the group level.

Emergence-enabling states address the influence of group-level cog-nitive, affective, and behavioral phenomena. The cognitive componentincludes group climate (e.g., shared goals), memory (e.g., mental models),and learning (e.g., capacity of knowledge assimilation). The affectivecomponent includes group cohesion (i.e., the attraction of group membersto one another), trust, and positive mood (i.e., the “emotional orientation”of the group, Ployhart & Moliterno, 2011, p. 140). The behavioral compo-nent includes cooperative and collaborative actions. Task environmentcomplexity is usually addressed in the pay variation literature as interde-pendence, an issue we alluded to earlier. For example, Shaw et al. (2002,p. 494) argued that “work interdependence is the implicit key to theeffectiveness of pay compression.” When interdependence is high, itis argued that large pay variations erode cooperation. According toPloyhart and Moliterno (2011), when member interactions and the needfor collaboration are high (i.e., high task complexity), the group shouldbe the most successful if affective psychological states and cognitivemechanisms create a collaborative environment (i.e., emergent enabl-ing states). This is specifically an issue of within-group interdependence.Thus, we focus on within-group interdependence as it affects groupoutcomes.


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Group climate, cohesion, memory, learning, trust, positive mood, andinterdependence are potential influences on group level satisfaction/reten-tion and group level motivation/performance. These factors, along withallocation rules and member performance homogeneity (factors identifiedat the individual level as critical) are relevant in determining the effects ofpay variation. We note here the conditions necessary for pay variation tohave positive group-level effects.

Equality allocation rules, combined with high performance-based payvariation, imply large between-group differentiations and no (or small)within-group differentiations in pay. Because pay is performance-based,high-performing groups receive more pay than low-performing groups.Because within-group allocations are equality-based, all group membersreceive the same amount of money. When within-group interdependence ishigh, it is important that group members collaborate with one another, andequal pay allocations promote this objective. The group dynamics literatureprovides evidence that such an environment is conducive to higher levels ofgroup performance and higher positive affect in the group (Barsade &Gibson, 2012; DeMatteo, Eby, & Sundstrom, 1998). That is, emergence-enabling states develop due to equality allocations, promoting both grouplevel motivation/performance and group level satisfaction/retention. Butthe situation is more complicated than this. Feelings of inequity could cre-ate dissatisfaction or turnover at the individual level. As noted, these feel-ings may be high for high performers in equality and high pay variationsettings. Thus, any predictions around the implications of pay variation atthe group-level must take into consideration the feelings and turnovereffects occurring at the individual-level.

Two situational factors illuminate this complexity � heterogeneity ofgroup member contributions, and within-group interdependence. Ifmember performance levels are heterogeneous, inequity is likely to beexperienced by high performers under equality allocation rules. The greaterthe pay variation, that is, the higher the reward intensity, the higher thepotential feelings of inequity and the greater the consequent potential forturnover among high performers. Thus, when member performance andcontributions are not roughly equal, the development of emergence-enabling states is likely to be retarded, as members making bigger contribu-tions begin to resent those with marginal contributions, and develop lowersatisfaction levels (Proposition 5).

The introduction of interdependence complicates the situation further.When work is independent, emergence-enabling states may lead to positiveaffect, but not necessarily to better performance. This is because, in an


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independent setting, cooperation is not critical to effective performance.The positive effects of emergence-enabling states on performance arelimited as a consequence. Under equality allocation rules and high pay var-iation, both workgroup motivation/performance and workgroup satis-faction/retention are affected positively when member performance ishomogeneous and the task is interdependent, but the effects on perfor-mance are likely to be weaker when the task is independent.

As noted above, motivation and satisfaction are different outcomesthat should be treated differently. Equity rules hold greater promise ofhigh motivation and performance as pay variation increases. Since payvariation is based on performance, group performance should be posi-tively affected by firm-level pay variations in both high and low interde-pendence contexts. This is because individual performance is high(Proposition 4); this should aggregate to higher group performance, parti-cularly when the performance of group members is universally high.Furthermore, since equity allocation rules encourage higher performers tostay in, and lower performers to leave, the organization, most group mem-bers should have high performance over time. These dynamics are unlikelyto be affected by within-group interdependence, since individual membersall strive for higher performance, regardless of whether work is indepen-dent or interdependent.

The effects of equity allocation rules on workgroup satisfaction levelsare likely to be more complex. Specifically, member contribution homoge-neity and task interdependence should moderate the effects on overallgroup satisfaction/retention outcomes. High pay variations with equityallocation rules should be equitable in low interdependence environmentsdue to task-reward alignment. Low performers, who may be less satisfiedwith the distribution, are likely to leave in these conditions (Proposition 6)so that those remaining are likely to be satisfied. If member performance ishomogeneously high, higher levels of group performance will entail higherpay allocations at the group level as well, leading to higher levels of satis-faction/retention.

These arguments lead to the propositions below. All else equal,

Proposition 7. The relationship of pay variation to group level motiva-tion/performance and satisfaction/retention depends on allocation rules,task interdependence, and performance homogeneity.

Proposition 7a. Under equality allocation rules, pay variation ispositively related to group motivation/performance and group


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satisfaction/retention when group member contributions are homo-geneous and task interdependence is high.

Proposition 7b. Under equity allocation rules, pay variation is posi-tively related to group motivation/performance.

Proposition 7c. Under equity allocation rules, pay variation is posi-tively related to group satisfaction/retention when task interdependenceis low and when member contributions are homogeneously high.

Relevant ResearchResearch addressing these issues is almost solely focused on sports teams(Shaw, 2014). In sports teams, the pay variation measure is usually basedon athlete salaries, since athletes represent the core workgroup of interest.Since the unit of analysis in this case is the team, the effects of pay varia-tion cannot be distinguished from equity/equality allocation rules. Theextent of compression is essentially identical to the extent of equality allo-cation, and the extent of dispersion essentially identical to the extent ofequity allocation. This research also commonly uses statistical controls thatremove ability-related variance (a problematic procedure, since ability is acritical, Proposition 1). Application of this research to the propositionsabove is therefore problematic. Still, the research does indicate that differ-ences in pay that are based on individual inputs are associated with higherteam performance even in high task interdependent contexts (Trevor et al.,2012), supporting Proposition 7b.

Abeler et al. (2010) provide an especially interesting experimental findingaddressing the application of equality and equity allocation rules in influen-cing group performance. The authors allowed pairs of individuals to selecteffort levels after being assigned to equality pay allocation or equity payallocation conditions. In the equality condition, group outcomes were influ-enced by the effort levels of low performers because high performersreduced their effort levels to match those of low performers over time; inthe equity condition, group outcomes were influenced by the effort levels ofhigh performers, since low performers increased their effort levels to matchthose of high performers. The authors concluded that the “results suggestthat adherence to the norm of equity is a necessary prerequisite for success-ful establishment of gift-exchange relations” (Abeler et al., 2010, p. 1299).This study has limitations (i.e., the lack of real effort, groups were dyads),but it provides support for the positive effects of pay variation on groupperformance, so long as equity is maintained either due to homogeneous


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contributions (Propositions 7a and 7c) or through equity allocation rules(Propositions 7b and 7c). Overall, the dearth of research on team outcomesbeyond the sports setting makes the study of group-level outcomes fertileground for future pay variation research.

Pay Variation and Outcomes at the Organizational Level

At the organizational level, pay variation research generally focuses onorganizational performance or workforce performance. Organizational per-formance outcomes include profits, return-on-equity, and return-on-investments (e.g., Belfield & Marsden, 2003; Carpenter & Sanders, 2004;Conyon, Peck, & Saddler, 2001; Firth et al., 2010; Leonard, 1990; Siegel &Hambrick, 2005). Workforce-performance outcomes include productivity,safety, and turnover (e.g., Bloom, 1999; Brown, 2006; Depken, 2000; Kepeset al., 2009; Shaw & Gupta, 2007; Shaw et al., 2002), often of a core work-force. Some studies include both types of outcomes. For example, Bloom(1999) reported similar relationships between pay variation in MajorLeague Baseball and both team and financial performance. In a study ofhospitals, Brown, Sturman, and Simmering (2003) also examined bothworkforce performance (average length of patient stay and patient survivalrate) and organizational performance (return-on-assets).

Workforce performance is clearly different from financial performance.Some scholars (e.g., Gupta et al., 2012; Shaw et al., 2002) posit that work-force performance is an intermediate outcome that mediates the relation-ship of pay variation to organizational performance such that payvariation→workforce performance and workforce performance→organiza-tional performance. But other research overlooks this distinction andfocuses on pay variation→organizational performance. Beyond the maineffect/mediation argument, the size of the payroll could also affect the rela-tionship between workforce and organizational performance. For instance,workforce performance may improve, but because the organization hashigher pay levels for high-performing employees, the payroll costs go up aswell, eroding organizational financial performance. Another example ofthis complexity was provided in a study of the National Football League.Specifically, Mondello and Maxcy (2009) reported a negative relationshipbetween pay dispersion and team winning percentage, but a positive rela-tionship between pay dispersion and financial performance. They arguedthat the high pay variation necessary to attract “stars” may hinder teamcollaboration in this interdependent setting, but help financial performance


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by increasing ticket sales. It is beyond the scope of this article to explorethese complexities in the relationship of workforce and organizational per-formance. Instead, we limit attention to specific pay variation issues,reminding readers to remember that the two outcomes are not equivalent,and lessons about one cannot be applied whole-cloth to the other.

Numerous issues affect the nature of the relationship between pay varia-tion and workforce performance. The foregoing exposition highlights com-plexities in the pay variation�workforce performance relationship at theindividual and group levels. These complexities are magnified multifold atthe organizational level. In view of this, we make configurational predic-tions here (i.e., emphasizing the “multidimensional constellation of concep-tually distinct characteristics”; Meyer, Tsui, & Hinings, 1993, p. 1175).Group dynamics cannot necessarily be applied unaltered to the organiza-tional level. For example, group allocation rules cannot be generalized tothe organization. Instead, the focus must be on the prevalence of particularallocation rules. Do most groups in the organization use equity or equalityallocation rules? Alternatively, is performance heterogeneity or homogene-ity predominate across groups? Our exposition separates allocation rulesbased on contexts with a preponderance of equity allocation rules and con-texts with a preponderance of equality allocation rules. Likewise, we differ-entiate between the preponderance of groups with performanceheterogeneity or performance homogeneity.

To some extent, predictions made at lower levels can be extended to theorganizational level. For example, an organizational policy of wideperformance-based pay variations and equity allocation rules combinedwith employees who have the ability to perform well, who see clear connec-tions between performance and pay, and who value money, should result inhigher workforce performance at the organizational level, and consequentlyhigher organizational financial performance as well. But this is not a com-plete picture.

One issue concerns the performance of different workforces in the orga-nization. Performance of one group of employees (e.g., administrative assis-tants) may be high, while that of another group (e.g., sales staff) is low.How should these employee groups be combined? The relative importanceof various employee groups must be weighted in the combination. The stra-tegic HR literature has focused considerable attention to core employeegroups, arguing that the HR policies for core groups are critical for organi-zational success (Lepak & Snell, 1999). The implication is that coreemployee workforce performance should be given greater weight in thecombination.


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An additional complexity surrounds the role of interdependence. Theprevious section proposed different effects when within-group interdepen-dence is high versus when it is low. At the workgroup level, this argumentmakes sense. But the argument applies at the organizational level onlywhen between-group interdependence is low. If groups must coordinateand cooperate with one another, high between-group pay variations couldalso be corrosive, since high between-group pay variations would fosterinter-group competition.

Moreover, the relative importance of workforce performance and work-force turnover outcomes in organizational performance must be consid-ered. The selection literature has devoted considerable attention to theissue of utility (e.g., Schmidt & Hunter, 1983) � the financial value of HRsystems such as selection. An integral component of utility formulas isSDy, the standard deviation of employee performance in dollars. It is morefinancially beneficial for the organization to spend resources to improveperformance when SDy is large than when it is small. Likewise, turnoveramong some employee groups is more expensive than turnover amongother employee groups (Cascio, 2000). Turnover among highly skilled,hard-to-replace employees is likely to be much more expensive than turn-over among unskilled employees. As we aggregate from workforce perfor-mance and workforce turnover to organizational performance, then, therelative costs and benefits of workforce performance and workforce turn-over must be inherently integrated into the equation.

In view of these arguments, we offer the following propositions. Allelse equal,

Proposition 8. The relationship between pay variation and workforceperformance outcomes at the organizational level depends on the config-uration of allocation rules, group member contribution homogeneity,and within- and between-group interdependence. Optimal configurationsfor the effectiveness of pay variation in promoting workforce perfor-mance include the following:

Configuration A. Predominantly equality allocation rules, homoge-neous group member contributions, high within-group interdepen-dence, and low between-group interdependence

Configuration B. Predominantly equity allocation rules, homoge-neous or heterogeneous group contributions, low within-group inter-dependence, and low between-group interdependence


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Proposition 9. The relationship between pay variation and organiza-tional performance depends additionally on the relative costs and bene-fits of workforce performance and workforce turnover.

Relevant ResearchSome of the factors noted in Propositions 8 and 9 are not commonly mea-sured or addressed in pay variation research (i.e., group member heteroge-neity, between-group interdependence). As a result, few studies bearing onthese propositions are available. One study � the Kepes et al. (2009) studydescribed earlier � represents an approximation of Configuration B. Specifically,this study was conducted in the trucking industry where between-groupand within-group interdependence tends to be relatively low. In this study,performance-based pay variation was individually based and thusresembled equity-based allocations more closely. Thus, the sample repre-sented a low interdependence, equity-based setting, and the relationship ofperformance-based pay variation to performance was positive, supportingelements of Configuration B. Clearly, more research on configurations atthe organizational level is needed.

OTHER ISSUES IN PAY VARIATION RESEARCH

The exposition above makes it abundantly clear that pay variation is acomplex phenomenon with many influences operating at different levels. Italso suggests many directions for future research, such as greater attentionto group homogeneity and both within-group and between-group interde-pendence. Table 1 summarizes the prior section.

In addition to the illustration, there are numerous additional issues bothwithin and across levels that should be investigated. These are addressedbelow.

Homogeneity of Pay Variation

We pointed out earlier that organizations can have many different kinds ofvariation. Not only can variation be horizontal, vertical, or overall, but thereare also at least as many different horizontal variations as there are jobfamilies. Most studies do not address this issue, assuming either than the dif-ferent variations are inherently identical or completely different (e.g., Ding,Akhtar, & Ge, 2009). The existence of multiple variations raises interesting


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questions. Does wide horizontal variation for one employee group have thesame effects when it is coupled with narrow and wide variations for anothergroup? If some variations are compressed and others dispersed, are theeffects the same as when all are compressed or all are dispersed? Do employ-ees respond differently when all job families are treated the same (universallywide or universally narrow variations)? These issues must be addressed com-prehensively as the knowledge base on pay variation matures.

Related research sheds some light on the matter. Cowherd and Levine(1992), for example, reported particularly pernicious effects when the wagesof lower level employees were below-market but managers’ pay was abovemarket. Using skill-based pay among line workers and job-based payamong staff workers has also been reported to be problematic (Jenkins &Gupta, 1985). Employees make social comparisons, and the treatment ofother employee groups affects employee reactions. The network of pay var-iations across the organization is necessarily the context within which theimpact of any specific variation is embedded.

Different Forms of Pay

So far we have discussed pay variation as though there were a single com-mon definition of pay. But compensation scholars (e.g., Milkovich et al.,

Table 1. Factors Influencing the Pay Variation�PerformanceRelationship.

Organizational performance • Individual satisfaction and performance

• Group emergence-enabling states and performance

•Workforce performance

• Costs and benefits of workforce performance and turnover

Workforce performance • Individual satisfaction and performance

• Group emergence-enabling states and performance

• Allocation rules

• Group member contribution heterogeneity

•Within-group and between-group task interdependence

Group performance • Individual satisfaction and performance

• Allocation rules

• Group member contribution heterogeneity

•Within-group task interdependence

Individual performance • Allocation rules

• Ability

• Valence of pay

• Clear pay→performance linkages


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2014) address many different kinds of pay � for example, direct financialcompensation (pay), or direct and indirect financial compensation (pay andbenefits). Pay variation research has used many different operationaliza-tions of pay. For example, Wright, Kroll, Lado, and Elenkov (2005)studied variations in vertical options pay, while Grund and Westergaard-Nielsen (2008) studied pay raise variation. The effects of these varieddefinitions are arguably different. We urge scholars to be sensitive to thesedifferences across studies, and to define their own measures clearly in theirreports.

Different Populations

The samples used in different studies can also affect the observed results.Much pay variation research is conducted in sports settings (e.g., Becker &Huselid, 1992; Berri & Jewell, 2004; Mondello & Maxcy, 2009; Trevoret al., 2012), or with TMT or top executive samples (e.g., Messersmithet al., 2011; Shen, Gentry, & Tosi, 2010). These populations are popularsubjects of research for one main reason � pay information is availablepublicly. But the repeated use of these samples poses severe constraints ongeneralizability. One, the very fact that pay information is publicly avail-able represents a boundary condition. Many organizations observe policiesof pay secrecy (Belogolovsky & Bamberger, 2014; Collela, Paetzold,Zardkoohi, & Wesson, 2007). Public communication of pay informationimplies that employees have accurate pay information. But when pay issecret, much misinformation can prevail. It is not clear that accurateand inaccurate information yield the same reactions among employees. Asecond problem is that construct valid archival information on key vari-ables is not always available, and researchers rely instead on marginalproxies. We addressed some of these proxies earlier. In addition, withexecutive samples, public pay information is usually available only for thetop five executives (e.g., Henderson & Fredrickson, 2001; Messersmithet al., 2011; Shen et al., 2010; Wu, Wei, & Liang, 2011). The top five execu-tives represent only a small segment of the executives in an organization. Inview of these concerns, we urge scholars to expand their pay variationinvestigations beyond sports and top-five executives, and to recognize thelimitations that these samples embody. Yanadori and Cui (2013) providean example of an interesting sample that provides new knowledge.Specifically, they studied research and development groups and were ableto make predictions and test of the effects of pay variation on innovation.


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A large number of pay variation studies have been conducted in non-USsettings. At least 40 of the papers we reviewed represented non-US samples.These include Israel (Ang et al., 1998), China (Ding et al., 2009), Denmark(Clark, Kristensen, & Westergard-Nielsen, 2009), Germany (Bartling &von Siemens, 2011; Jirjahn & Kraft, 2010), Portugal (Martins, 2008),Sweden (Heyman, 2005; Hibbs & Locking, 2000), Taiwan (Lin, 2008;Tao & Chen, 2009), and Australia (Avent-Holt & Tomaskovic-Devey,2010; Drago & Garvey, 1998; Orlitzky et al., 2006). The broad interna-tional interest in pay variation is encouraging. At the same time, it high-lights the importance of detailing the contextual and cultural issues thatcould cloud results. Levine’s (1993) research, conducted across cultures,highlights this point. Within our framework, the effects of equity andequality allocation rules could vary dramatically across cultures (Shaw,2014). We hope that future research heeds this concern.

Causality and Endogeneity

Ironically, most pay variation research from the management perspectivehas used survey and archival data, while research from an economics per-spective has used experimental designs more frequently (e.g., Charness &Kuhn, 2007; Eriksson, Teyssier, & Villeval, 2009; Freeman & Gelber,2006; Harbing & Irlenbusch, 2003, 2008, 2011). Experimental designs pro-vide stronger evidence of causality, but in pay variation research, manyof these designs are problematic. For example, rather than actual effort,studies have used ratings of the choice of intended effort (Abeler et al.,2010; Bartling & von Siemens, 2011). Also, these studies usually assumehomogeneity of ability levels across the sample (Abeler et al., 2010;Bartling & von Siemens, 2011; Eriksson et al., 2009). If the design neces-sitates varying skill levels, the skill levels are assigned, not varying natu-rally (e.g., Harbring & Luenser, 2008). Because of these and otherproblems with the design, causal inferences are difficult. In both manage-ment and economics literatures, causality remains ambiguous as a result.Do organizations with certain pay characteristics perform better? Or dosuccessful organizations use certain kinds of pay systems? These kinds ofquestions remain unanswered. The use of longitudinal designs helps, butis not enough. Recently, Grant and Wall (2009) called for increasedexploitation of naturally occurring field experiments to address thesedilemmas empirically. This is a useful recommendation for pay variationresearch.


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Nature of the Relationship

Most pay variation research assumes a linear relationship between pay var-iation and outcomes, be the relationship positive or negative. But this maynot necessarily be the case. Grund and Westergaard (2008), for example,tested a curvilinear relationship between overall pay raise variation andfirm performance. The authors discovered a mostly negative relationship,but the relationship became positive at the highest levels of pay variationamong white-collar workers (but not among blue-collar workers) inDenmark. Franck and Neusch (2011) found a U-shaped relationshipbetween horizontal variation and team performance among German soccerteams, but Winter-Ebmer and Zweimuller (1999) reported inverse U-shapedrelationships between horizontal variations and performance among blue-and white-collar workers in Australia. The inverse U-shaped relationshipwas supported by Mahy, Rycx, and Volral (2011) for overall variation andworkforce performance in Belgian firms. Studies among National HockeyLeague (NHL) teams (Trevor et al., 2012) and in experimental settings(Freeman & Gelber, 2006) also support an inverse U-shaped relationship.

Evidence suggests that the relationship of pay variation and outcomesmay be curvilinear. Unfortunately, design problems in these studies (e.g.,weak operationalizations of performance) and inconsistencies across stu-dies (different predictors, different outcomes, different populations) makegeneral conclusions difficult. Still, further exploration of curvilinear rela-tionships holds promise.

Basis of Pay Variation

We confined our exposition to performance-based horizontal pay variation.But pay can vary for numerous reasons, including differences in jobs, dif-ferences in markets, differences in skill, performance, etc. Trevor et al.(2012) and Kepes et al. (2009) are among the few studies that explicitlyaddressed the basis of pay variation. More studies need to integrate thebasis for pay variations into their designs.

In addition, more theory and research are needed to explore the effectsof nonperformance bases of pay variation. Kepes et al. (2009) found dele-terious effects of politics-based pay variation; Shaw and Gupta (2007)reported different dynamics for performance- and seniority-based varia-tion. The notion that seniority-based variation promotes retention hascredibility. The notion that seniority-based variation does not affect


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performance (at the individual or the organizational level) also has credibil-ity. But these are mere speculations. Knowledge of pay variation dynamicscould benefit from both theoretical and explorations of nonperformancesources of variation.

It is often the case that pay depends on multiple factors, not a singlefactor. For example, merit pay is based on supervisor ratings, and supervi-sor ratings can incorporate both performance and political factors(Longenecker, Sims, & Gioia, 1987; Cleveland & Murphy, 1992). Ifperformance-based variations affect performance positively and politicallybased variations affect performance negatively (as Kepes et al., 2009, sug-gest) what is the net result on performance? We need research that expli-citly addresses multiple bases of pay variation simultaneously.

CONCLUSIONS

Pay variation is at once a complex enigma and a challenging area ofresearch. This paper highlights some of these complexities and offers ideasabout how to begin addressing these complexities. At this point, there isplentiful evidence about the simple pay variation→performance relation-ship. This research area has matured, and it is time to give the intricacies ofpay variation their due. We illustrated the differential interplay of etiologi-cal dynamics at varying levels of the organizational pyramid. We hope thismultilevel perspective and the issues raised here help to move us toward arich understanding of the payoffs, the problems, and the pitfalls of thisinherently fascinating topic.

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APPENDIX: SUMMARY OF EMPIRICAL FINDINGS

Study Sample Type Predictor Criterion Key Findings

Abeler et al. (2010) Students (Germany) Horizontal Pay variation

manipulation

Individual effort;

profit

When the principal was allowed to vary wages,

performance increased overall, but when the

principal was required to give equal payment,

performance was lower. In the equal wage

treatment condition, low effort providers

determined group outcomes while in the

individual wage treatment condition, high effort

providers determined outcomes.

Ang et al. (1998) Executives (Israel) Vertical Contestability of

CEO position;

pay-for-

performance

sensitivity; pay

ratio

Pay variation; firm

performance

In firms managed by owners, pay variation was

greater between owner-CEO and executives. The

only time that high pay variation led to higher

performance was in the case of owner-managed

firms.

Avent-Holt and

Tomaskovic-

Devey (2010)

National organization study

(Australia)

Vertical Gender composition;

ethnic

composition;

permanence

composition;

education;

autonomy;

professional; craft;

unionization

Pay ratio Pay variation between managerial and core jobs

was accounted for by gender composition, ethnic

composition, relative education, core job

autonomy, core professional job category, and

core job unionization. Pay variation between

core jobs and lowest level jobs was accounted

for by gender composition, permanence

composition, relative education, and relative

autonomy. Under centralized wage settings, the

authors find that pay variation tends to be

explained by more legitimate factors (e.g.,

education, skill) than under unmonitored

environments (e.g., gender is more explanatory).

Backes-Gellner and

Pull (2013)

Salespeople (Germany) Vertical (tournament

structure)

Employee

heterogeneity;

winner�contest

ratio

Individual

performance

Effort levels were lower in heterogeneous contests

than in homogeneous contests. Employees on

the threshold of winning an award exert effort

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Appendix. (Continued )


Baker, Gibbs, and

Holmstrom (1994)

Management employees of one

firm

Horizontal; vertical;

overall

Cohort Pay level; pay range Exit rates did not vary primarily due to relative

wage. Variation between cohort wages was

explained by varied starting wages by year. The

distributions of wages were widened by top

earners increasing earnings more rapidly than

others. Variation in rates across levels and

variation in rates within levels appeared to be

driven by a common underlying factor (the

authors suggested it may be ability).

Bartling and von

Siemens (2011)

Students (Germany) Horizontal Pay variation

manipulation

Worker effort and

morale

Participants chose whether or not to participate in

groups and then were either given equal wages

or unequal wages. No differences in effort or

participation were found between groups in the

unequal wage treatment and the equal wage

treatment.

Beaumont and

Harris (2003)

Annual census of production

manufacturing firms (UK)

Vertical Pay ratio Firm performance In most sectors, pay variation was related to higher

performance. In the pharmaceutical sector,

compressed structures were related to higher

performance. Large, non-UK firms had stronger

pay variation and firm performance

relationships than small, UK firms.

Becker and Huselid

(1992)

Auto-racing drivers Horizontal Prize range Individual

performance

(speed and

adjusted finish)

Performance increased with prize spread. This

incentive effect diminished with increasing prize

spread. Large spreads, greater than one standard

deviation above the sample mean, led to

increased hazardous driving behaviors.

Beersma et al. (2003) Students Horizontal Pay variation

manipulation

Team performance Team performance was dependent on reward

structure, task dimension, and team

composition. Equal (cooperative) structures led

to greater accuracy. Unequal (competitive)

structures led to greater speed. Extraversion and

agreeableness performed best under cooperative

structure.

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Belfield and Marsden

(2003)

Workplace employee relations

survey firms (UK)

Overall Performance-related

pay

Pay ratio; firm

performance

Performance-related pay was related to greater pay

variation. Performance-related pay was related

to higher performance. Input-based pay was

related to higher performance when monitoring

environments were expensive and inaccurate

than when they were cheap and accurate.

Ben-Ner, Ren, and

Paulson (2011)

Human service firms Vertical Firm type Pay level; pay ratio Wage level differences were not statistically

significant across firm types. Pay variation was

lower in government and nonprofit firms than in

for-profit firms. For-profit firms used financial

incentives more than nonprofit and government

organizations.

Berri and Jewell

(2004)

NBA teams Horizontal Change in pay

dispersion

Team performance Changes in pay variation on NBA teams did not

lead to changes in winning percentages.

Bishop (1987) Firms with more than 85

employees

Horizontal Productivity; training Pay level Productivity relative to peers influenced wage rates

in small and medium nonunion firms, but did

not have an effect in unionized and large firms.

Wages responded to differences in productivity,

but these adjustments were not complete.

Bloom and Michel

(2002)

Two samples: executives and

managers

Horizontal; overall Pay dispersion;

investment

opportunities;

environmental

instability;

environmental

munificence;

diversification

Tenure; turnover;

pay dispersion

Investment opportunity, environmental

munificence, and environmental instability were

positively related to pay variation. Pay variation

was negatively related to tenure and positively

related to turnover.

Bloom (1999) MLB teams Horizontal Pay dispersion Individual

performance;

organizational

performance

The negative pay variation and individual

performance relationship was moderated by

location in the distribution, such that those

lower in the distribution are more negatively

affected by pay variation.

Bloom and Michel

(2002)

Managers Overall Pay dispersion Turnover; tenure Pay variation was negatively related to tenure and

positively related to turnover.

Blume et al. (2009) Students Horizontal Consequences of

poor performance;

reward

differentiation;

comparison group

size; feedback

frequency

Attraction to FDS Individuals were attracted to greater reward

differentiation. Higher cognitive ability was

associated with greater preference for reward

differentiation in forced distribution systems.

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Bognanno (2001) Executives of large firms Vertical Number of

executives

competing for

CEO position

Pay range between

CEO and lower

levels

Promotions from within at the executive level were

common. Pay variation increased at each level.

The number of “competitors” for the CEO prize

increased with the pay variation.

Brown (2006) Hospitals Vertical Pay dispersion Workforce

performance

Pay level and pay variation interacted to predict

heart attack mortality rates, such that higher

pay levels reduced the negative impact of

hierarchical structures on workforce

performance.

Brown et al. (2003) Hospitals Vertical Pay dispersion Workforce

performance

Pay variation had a negative relationship with

resource efficiency and patient care outcomes

when pay levels were low. Hierarchical pay

leading the market or egalitarian pay lagging the

market had the best financial performance

results.

Carnahan et al.

(2012)

US Census Bureau longitudinal

establishment household

database (legal service

employees)

Overall Pay dispersion Turnover High performers are less likely to leave firms with

high pay variation, but if they do leave, they are

more likely to form new firms. Low performers

are more likely to leave when there is high pay

variation. The measure for performance was

based on pay level.

Carpenter and

Sanders (2004)

Executives of multinational

firms

Vertical TMT pay level; LTIP

structure; pay

range

Firm performance CEO-TMT pay variation was negatively related to

future firm performance. Pay gap and degree of

internationalization interacted such that higher

internationalization strengthened the pay

gap�performance relationship (more negative

when high internationalization).

Charness and Kuhn

(2007)

Students Horizontal Pay range Effort Effort decisions were strongly related to own

wages. Coworkers’ wages did not affect effort.

Chen and Shum

(2010)

Retail stores Vertical Worker effort Pay range Worker effort did not completely explain pay

variation. Much of the range, then, was believed

to be an incentive for lower level workers.

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Christie and Barling

(2013)

Faculty (Canada) Horizontal Pay dispersion;

communal sharing

preferences

Trust perceptions Pay dispersion and communal sharing preferences

interact to predict trust perceptions. The

relationship between pay dispersion and trust

perceptions is positive for those with low

communal sharing preferences.

Clark et al. (2009) European Community

Household Panel (Denmark)

Overall Firm pay level; own

pay level

Satisfaction Individuals were more satisfied when firm average

pay was higher (controlling for own pay level).

Satisfaction was not affected for individuals

earning more than the average pay level.

Colvin, Batt, and

Katz (2001)

Service and sales reps of

telecommunication

establishments

Vertical Skilled workforce

investments;

teams;

performance-

based pay;

HPWP;

information

technology;

electronic

monitoring;

unionization

Manager pay level;

manager-to-

worker pay range

High performance HR practices were negatively

related to manager-to-worker pay variation. Use

of teams and variable pay were also related to

lower manager-to-worker pay variation.

Unionization was related to lower level of

manager-to-worker pay variation.

Connelly, Haynes,

Tihanyi,

Gamache, and

Devers (2013)

Publicly traded firms Overall Pay ratio Short-term firm

performance;

long-term firm

performance trend

Pay variation has a positive relationship with short-

term firm performance, but a negative

relationship with a firm’s long-term performance

trend

Conyon et al. (2001) Executives (UK) Vertical; overall Organizational level;

number of

contestants; pay

range and

dispersion

Executive pay; pay

range and

dispersion; firm

performance

The relationship between pay and organization

level was convex. Number of contestants was

correlated with executive pay variation. Pay

variation did not significantly affect firm

performance.

Cowherd and Levine

(1992)

Managers and workers of

manufacturing business units

Vertical Pay equity Product quality There was a positive relationship between pay

equity for hourly and lower level workers and

product quality.

Cunat and

Guadalupe (2009)

Executives of manufacturing

firms

Overall Import penetration

(globalization)

Pay structure

variables (basis,

level)

Greater globalization led to a decrease in

nonperformance-related compensation and an

increase in pay for performance. Total pay

increased most for the top executive and

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DeBrock, Hendricks,

and Koenker

(2004)

Major League Baseball (MLB)

teams

Horizontal Pay dispersion Individual

performance;

organizational

performance

Pay variation had a negative relationship with team

and organizational performance.

Depken (2000) MLB teams Horizontal Pay dispersion Team performance Pay variation had a negative relationship with team

performance.

Devaro (2006) Professional and skilled workers Vertical Pay range; relative

performance

Worker performance;

promotion

Relative performance influenced promotion

outcomes. Greater vertical pay variation led to

better worker performance.

Ding et al. (2009) Manufacturing and service firms

(China)

Horizontal; vertical Pay dispersion Firm performance Vertical pay variation between managers and

workers was positively related to performance.

Horizontal pay variation was negatively related

to some measures of performance.

Dominguez and

Gutierrez (2004)

Wage structure survey (Spain) Overall Collective bargaining

arrangement

Pay dispersion Bargaining at the firm level is related to lower

variation than bargaining at the sector level.

Other factors have stronger effects than the

bargaining level influence on pay variation such

that pay variation is actually higher for firms

that bargain at the firm level rather than the

sector level.

Drago and Garvey

(1998)

Workgroups (Australia) Horizontal Piece rate; share

scheme; task

variety; pay

residuals

Helping behaviors;

individual

absenteeism

Individuals engaged in fewer helping efforts and

greater individual effort when there were greater

promotion incentives.

Ehrenberg and

Bognanno (1990a)

Professional golf tournaments Horizontal Total prize; pay

range

Individual

performance

Greater prizes led to higher performance. Larger

marginal prizes were related to lower final scores

(lower indicated better performance).

Ehrenberg and

Bognanno (1990b)

Professional golf tournaments

(Europe)

Horizontal Total prize; pay

range

Individual

performance

A replication of Ehrenberg and Bognanno (1990a)

on European professional golf. Greater prizes

led to higher performance. Larger marginal

prizes were related to lower final scores (lower

indicated better performance).

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Ensley et al. (2007) Executives of fast growing

private firms

Overall Family-ownership;

pay dispersion

Pay dispersion; firm

performance

Pay variation was lower in family owned firms than

nonfamily-owned firms. Negative influences of

pay variation on firm performance occurred

through the effect of pay variation on potency,

cohesion, affective conflict, and cognitive

conflict. These negative influences on pay

variation on firm performance were strongest in

family firms.

Eriksson (1999) Executives (Denmark) Vertical Environmental risk;

pay range and

dispersion

Pay range and

dispersion; firm

performance

Pay variation and risk were positively related. Pay

variation was positively related to firm

performance. Interdependence did not affect the

pay dispersion-firm performance relationship.

Eriksson et al. (2009) Students Horizontal Payment scheme Effort; effort

variability

When individuals chose their payment scheme

variance in effort was reduced and effort

increased. Self-selection of payment scheme was

largely related to risk aversion.

Firth et al. (2010) Executives (China) Vertical Firm performance Pay ratio and

residual; pay level

A positive relationship between pay variation and

performance was found.

Franck and Nuesch

(2011)

Professional soccer (Germany) Horizontal Pay dispersion Player behavior;

player

performance

Pay variation increased individualistic player

behaviors. A U-shaped relationship existed, very

high or very low pay variation led to higher

performance.

Fredrickson, Davis-

Blake, and

Sanders (2010)

Executives of large firms Horizontal TMT board

membership;

variation in stock

ownership;

average tenure;

pay dispersion

Pay dispersion; firm

performance

Greater potential for social comparisons were

related to lower non-CEO-TMT pay variation.

Non-CEO-TMT pay variation was negatively

related to firm performance and stock price

volatility moderated this relationship.

Freeman and Gelber

(2006)

Students Horizontal Pay variation

manipulation

Individual and group

performance;

deviance

There was an inverted U-shaped relationship

between pay variation and performance;

performance was higher at moderate levels of

variation, and this relationship was strongest in

full pay information settings. Performance was

higher when full information was available in no

inequality and medium inequality settings than

when no information was available. Cheating

increased when full information was available

about skill distribution and the pay inequality

level was medium.

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Freeman (1982) BLS wage survey Horizontal Unionization Pay dispersion; pay

practices

Unionized organizations have lower pay variation.

Wage practices that unions encourage reduced

pay dispersion.

Frick and Prinz

(2007)

Marathons Horizontal Pay dispersion; prize

level

Race times Larger prizes led to better running times. Greater

spread of the prize amount led to improved

racing times. Smaller prize differences between

ranks slowed running times.

Frick et al. (2003) Professional baseball,

basketball, football, and

hockey teams

Horizontal Pay dispersion Team performance The influence of pay variation depended on the

sport. Higher variation was positively tied to

performance in professional basketball and

negatively tied to performance in professional

baseball and football.

Gee and Wen-Jhan

(2008)

Professional baseball league

(Taiwan)

Horizontal Pay dispersion Team performance Inter-team and intra-team wage variations were

negatively related to performance.

Gilsdorf and

Sukhatme (2008)

Women’s professional tennis Horizontal Pay range Stronger athlete win Stronger players won more often than weaker

players as the prize spread increased, from this

the authors infer greater effort was elicited when

the spread was larger.

Glandon and

Glandon (2001)

Three universities Overall School size; school

type (teaching,

research)

Turnover; pay

compression index

Turnover was greater in small, teaching schools. A

tentative finding that salary compression did not

affect faculty turnover.

Gnyawali, Offstein,

and Lau (2008)

Executives of pharmaceutical

firms

Vertical Pay range Firm competitive

activity,

complexity, and

magnitude

Key finding was CEO-TMT pay variation was

positively associated with competitive activity

and complexity.

Gomez (2002) NHL teams Horizontal Pay dispersion Individual and team

performance

Team performance was lower for teams with

dispersed structures. Individual performance was

lower when there was greater pay variation.

Grund and

Westergaard-

Nielsen (2008)

Linked employer

�employee data (Denmark)

Overall Pay raise dispersion Firm performance The pay raise variation�performance relationship

was U-shaped (but the positive relationship was

only for the highest levels of variation). The

relationship existed for white-collar workers, but

not blue-collar workers.

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Linked employer

�employee data

Overall; vertical Pay ratio;

organization

sector

Service quality Pay variation has a positive relationship with

service quality in for-profit firms, but a negative

relationship in nonprofit organizations.

Harbring and

Irlenbusch (2003)

Students (Germany) Horizontal Number of

participants and

number of prizes

Effort Effort increased when there were a greater number

of prizes. There were fewer nonparticipants

when there were more prizes. There was less

effort variability when the number of prizes was

higher.

Harbring and

Irlenbusch (2008)

Students (Germany) Horizontal Number of

participants and

number of prizes

Effort; sabotage Tournament size did not appear to influence effort.

Effort was highest when there was a balance of

winner and loser prizes. Sabotage did occur in

tournament settings.

Harbring and

Irlenbusch (2011)

Students (Germany) Horizontal Pay range

manipulation;

framing of

sabotage

Effort; sabotage Effort levels and sabotage levels increased with

prize spread. Framing sabotage as sabotage and

indicating an employment situation reduced

sabotage. Effort was higher and sabotage was

lower in communication conditions. When

sabotage was not an option, tournament

incentives were chosen by principals more often.

Harbring and

Luenser (2008)

Students (Germany) Horizontal Pay range

manipulation;

ability

Effort Effort increased with prize spread. Stronger players

exerted greater effort when the prize spread was

the greatest.

Harder (1992) MLB and NBA teams Horizontal Pay equity Individual

performance;

cooperativeness

Under-rewarded players did not decrease

performance, and this was attributed to the pay-

for-performance context. However, under-

rewarded players engaged in more selfish

behaviors and over-rewarded players engaged in

more team-oriented behaviors.

He et al. (2004) Employees of steel,

transportation, and

petroleum firms (China)

Overall Ownership reform;

vertical and

horizontal

collectivism

Allocation preference An attitudinal shift to differential reward allocation

preferences was related to ownership reform.

Vertical collectivism was positively related to

differential allocation preferences. Horizontal

collectivism was positively related to

equalitarian preferences.

Henderson and

Fredrickson

(2001)

Executives of chemicals, high-

tech, and natural resources

firms

Vertical Relatedness; R&D

activity; capital

investment

activity; firm size;

number of vice

presidents; number

of firm businesses

Pay range; firm

performance

Executive pay variation was best predicted by

tournament theory. Multiple theories added

predictive value for explaining the pay variation

and firm performance relationship.

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Heutel (2009) Teachers Horizontal; overall Number of

competitors

Pay level Greater returns for promotion existed when there

were fewer opportunities for promotion.

Heyman (2005) Linked employee

�employer data (Sweden)

Overall Pay dispersion;

wages; number of

contestants;

market volatility

Firm performance;

job levels; pay

dispersion

The relationship between pay variation and profits

was positive. The relationship between pay

variation and average pay was positive. The

number of contestants was negatively related to

pay variation. Pay variation was positively

related to variation in sales.

Heyman, Sjoholm,

and Tingvall

(2011)

Linked employee

�employer data (Sweden)

Overall Acquisition/cross

border foreign

direct investment

Pay ratio Foreign direct acquisitions increased wages for

those at the top of the hierarchy and lowered the

wages of those at the bottom.

Hibbs and Locking

(2000)

Industrial firms (Sweden) Overall Pay dispersion Industrial output;

labor productivity

Industrial output had a negative relationship with

variation between firms and a positive

relationship with variation within firms. Labor

productivity had a negative relationship with

variation between firms and a positive

relationship with variation within firms.

Hunnes (2009) Linked employee

�employer data (Norway)

Horizontal; vertical Pay dispersion Firm performance No relationship between pay variation and

performance was found.

Jane, San, and Ou

(2009)

Professional baseball (China) Horizontal Pay dispersion; team

performance

Pay dispersion; team

performance

Pay variation was negatively related to

performance.

Jewell and Molina

(2004)

MLB teams Horizontal Pay dispersion Team performance Pay variation was negatively related to team

production but not team efficiency.

Jirjahn and Kraft

(2007)

Blue-collar employees of

manufacturing firms

(Germany)

Horizontal; overall Pay range Workforce

performance

A positive pay variation and performance

relationship was found and was moderated by a

number of factors, including internal

promotions (negative), piece rates (positive), and

works councils (negative).

Jirjahn and Kraft

(2010)

Blue-collar employees of

manufacturing firms

(Germany)

Overall; horizontal Teamwork Pay range Self-managed teams led to greater variation

between skilled and unskilled employees. This

relationship was moderated by training

(positive), production technology (positive), age

of the firm (negative), and collective bargaining

coverage (negative).

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Kale et al. (2009) Executives Vertical Pay range; CFO is

VP; firm size;

industry practice;

volatility

Pay range; firm

performance

The pay variation�firm performance relationship

was positive. The relationship was stronger

when a CEO was near retirement, weaker when

the CEO was new to the firm and when the new

CEO was an outsider.

Katayama and Nuch

(2011)

NBA teams Horizontal Pay dispersion Individual and team

performance

No causal effect was found between pay variation

and performance outcomes.

Kato and Long

(2011)

Executives (China) Vertical Pay ratio; size of

contestant pool;

noise in

performance

measure

Pay ratio; firm

performance

Pay variation was greater when there was a greater

number of contestants and when there was

greater market volatility. The relationship

between pay variation and performance was

positive, and moderated by state ownership

(lesser state ownership strengthened the

relationship).

Kepes et al. (2009) Drivers of trucking firms Horizontal Pay range Workforce

performance; firm

performance

Performance-based pay and pay variation

interacted to have a positive relationship with

workforce performance. Politics-based pay and

pay variation interacted to have a negative

relationship with workforce performance.

Lallemand et al.

(2004)

Linked employer

�employee data (Belgium)

Overall Pay residual, range

and dispersion

Firm performance The relationship between pay variation and firm

performance was positive. The pay

variation�workforce performance relationship

was moderated by work level (stronger for blue-

collar worker) and firm monitoring level

(stronger for higher monitoring levels).

Lambert, Larcker,

and Weigelt

(1993)

Managers and executives of

large, publicly traded

manufacturing and service

firms

Vertical Organization level;

managerial power;

executive

performance

Pay range; pay level The relationship between organizational level and

pay was convex with the CEO level providing

the largest increase in pay (supportive of

tournament theory). The relationship between

managerial power and pay level was positive

(supportive of managerial power theory).

Executive performance and pay level were

positively related (supportive of agency theory).

Overall, tournament and managerial power were

stronger predictors of pay level and variation

than agency theory.

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Lee et al. (2008) Executives Overall Pay dispersion Firm performance The pay variation and firm performance

relationship was positive. This relationship was

moderated by agency concerns and corporate

governance, the relationship was stronger in

firms with agency problems and stronger

corporate governance.

Leonard (1990) Executives Overall Hierarchical level;

promotion rate;

pay dispersion

Pay level; pay

dispersion; roe

Executive pay was largely associated with

hierarchical level. Pay variation was correlated

with hierarchical level.

Levine (1993) Manufacturing firms (US and

Japan)

Horizontal Pay residuals Quit rates; pay

satisfaction;

commitment

There was a relationship between residual wages

and quit rates (negative) and pay satisfaction

(positive). In Japan (but not in the United

States), receiving high wages in comparison to

others in the plant created discomfort among

employees.

Lin (2008) Textile company (Taiwan) Vertical Hierarchical level;

product price

Pay range Higher product price made effort more valuable, so

the pay structure convexity was strengthened by

product price.

Lin, Shen, and Su

(2011)

Executives (China) Vertical Talent demands;

number of

participants;

environmental

noise; time;

Chinese

government

ownership stake

Pay range; pay level Pay variation has increased over time in China. Pay

variation is highest at the top of the firm though

this is not a consistent increase. Pay variations

are tied to noise in the business environment.

The pay variation between tier 1 and tier 2 was

positively related to the number of tier 2

executives.

Liu et al. (2010) Linked employer

�employee data (Taiwan)

Overall Firm age; firm size;

labor quality; pay

dispersion

Workforce

performance

A positive relationship between pay variation and

firm performance was found. Labor quality was

positively related to firm performance.

Mahy et al. (2011) Linked employer

�employee data (Belgium)

Overall Conditional pay

residuals

Workforce

performance

An inverse U-shaped relationship between pay

variation and workforce performance. The pay

variation�workforce performance relationship

was moderated by skill level (stronger for higher

skill levels), but collective bargaining did not

moderate the relationship.

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Main et al. (1993) Executives Vertical; overall Human capital and

firm

characteristics;

number of VPs;

pay dispersion

Pay range between

CEO and lower

levels; firm

performance

Tournament mechanisms explained pay variation; a

greater number of contestants were related to

greater variation. A weak, positive relationship

was found between pay variation and firm

performance. Interdependence did not appear to

moderate the pay variation�firm performance

relationship.

Martins (2008) Linked employer

�employee data (Portugal)

Overall Pay range and

dispersion

Firm performance The pay variation and firm performance

relationship was found to be negative.

Messersmith et al.

(2011)

Executives of single industry

firms

Overall Pay dispersion;

incentive intensity;

relative market

pay position

Turnover Pay variation was positively related to executive

turnover. The relationship was moderated by

incentive intensity (strengthens the relationship).

The executive’s percentage of total

compensation was negatively related to

turnover.

Mondello and

Maxcy (2009)

NFL teams Horizontal Pay dispersion;

incentive

Organizational and

team performance

Payroll and incentive pay were positively related to

team performance. Pay variation was negatively

related to team performance, but positively

related to financial performance.

O’Reilly, Main, and

Crystal (1988)

Executives of large firms Vertical Firm size; firm

performance;

industry; CEO

tenure; number of

VPs; board

member pay

CEO pay level; pay

range

CEO pay was negatively related to number of VPs.

CEO pay was explained by compensation of

board members.

Orlitzky et al. (2006) MBA students (Australia) Overall Agreeableness Preference for equal

or unequal pay

Agreeableness was negatively related to normative

myopia (propensity to ignore ethical issues).

Normative myopia was positively related to

preferences for highly dispersed pay structures.

Normative myopia partially mediates the

agreeableness�pay dispersion preference

relationship (Agreeableness is negatively related

to normative myopia which is positively related

to preferences for high differentiated pay

structures).

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Ortin-Angel and

Salas-Fumas

(2007)

Spanish managers Overall; horizontal Education Pay dispersion Job tenure was positively related to pay variation;

education and work experience prior to job

entry were negatively related to pay variation.

Pennerstorfer and

Schneider (2010)

Linked employee�employer data of nonprofits

(Austria)

Overall Broad range of

demographic

variables;

volunteers;

income from

public authorities;

pay level;

collective

agreements

Pay dispersion Pay variation was related to use of volunteers

(negative), use of public subsidies (positive), and

income from public authorities (negative).

Petrescu and

Simmons (2008)

Firms (UK) Overall HRM practices;

perceptions of pay

inequality

Pay satisfaction; job

satisfaction

Performance based and seniority based pay were

associated with nonunion member satisfaction.

Perceptions of pay inequality led to lower job

and pay satisfaction.

Pfeffer and Davis-

Blake (1990)

University administrators Overall Race and gender

composition;

university type;

number of job

titles

Pay dispersion Pay variation was explained by tenure dispersion

(positive), private control (positive), and

institution type. Pay variation was also

explained by gender composition homogeneity

(negative). Number of positions was positively

related to dispersion when positions were

general administrative, but negatively related to

dispersion when positions were related to core

activities.

Pfeffer and Davis-

Blake (1992)

University administrators Overall Pay dispersion;

individual

location in the pay

distribution

Individual turnover Pay variation led to greater turnover, and this

relationship was strengthened by pay

information availability and external labor

market mobility.

Pfeffer and Langton

(1988)

Faculty Horizontal Variation in

productivity,

experience;

department size;

collaboration;

social contact;

university type;

department chair

Pay dispersion Pay variation was explained by private control

(positive), departmental size (positive), working

alone (positive), social contact (negative),

democratic and participative governance

(negative), demographic homogeneity (negative).

Pay variation was not found to be related to

variation in productivity.

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term;

participation;

autocratic

governance

Pfeffer and Langton

(1993)

Faculty Horizontal Pay dispersion Individual

satisfaction;

individual

performance;

individual

collaboration

Pay variation had a negative effect on satisfaction,

performance, and collaboration. The

relationship between pay dispersion and

satisfaction was moderated by fairness

(weakened), productivity and seniority pay basis

(weakened), individual pay level (weakened), pay

information availability (strengthened), and

commitment (weakened).

Pissaris, Jeffus, and

Gleason (2010)

Executives Vertical Pay range;

shareholder

power; board

ownership and

control; leverage

Firm performance Pay variation was positively related to firm

performance. This relationship was moderated

by duality (strong, positive for CEO duality, no

relationship when there is not duality), board

ownership (positive for high board ownership,

negative relationship for low board ownership),

and leverage (stronger for high leverage).

Powell,

Montgomery, and

Cosgrove (1994)

Teachers and teacher aides of

child care establishments

Horizontal Pay level; pay

dispersion

Quit and fire rates Pay variation was not significantly related to quit

or fire rates.

Richards and Guell

(1998)

MLB teams Horizontal Pay dispersion Team performance;

organizational

performance

Pay variation was negatively related to team

winning percentage, but unrelated to

organizational performance (measured as

attendance).

Riddell (2011) Greater Toronto area firms

(Canada)

Horizontal Pay dispersion Quit rates Horizontal pay variation was positively related to

quit rates in Toronto firms.

Rodriguez-Gutierrez

(2001)

Professional employees (Spain) Vertical Union density;

performance; pay

level;

unemployment

Pay dispersion Pay variation was negatively related to union

density and sales per employee and positively

related to pay levels. Pay variation increased

during economic slumps.

San and Jane (2008) Professional baseball teams

(Taiwan)

Horizontal Pay level; pay

dispersion

Team performance The relationship between pay variation and

performance was negative.

Shaw and Gupta

(2007)

Drivers of trucking firms Horizontal Pay dispersion Good performer

quits; average

performer quits;

poor performer

quits

Good performer quits were lower when pay

dispersion is high, performance-based pay is

emphasized, and pay system communication is

high. Average performer quits were lower when

pay dispersion is high, when seniority-based pay

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is emphasized and pay system communication is

high. Poor performer quits were not significantly

explained.

Shaw et al. (2002) Two samples: (1) Drivers of

trucking firms and (2)

production workers of

concrete pipe firms

Horizontal Pay range and

dispersion

Workforce

performance

Pay variation and individual incentive use

interacted to explain workforce performance,

such that higher performance led to better

performance when individual incentives are high

and worse performance when they are low. Pay

variation and interdependence interacted to

explain performance, such that higher variation

and highly interdependent work led to lower

workforce performance (as compared to low

interdependence and variation). A three-way

interaction between pay dispersion,

interdependence, and individual incentives was

related to performance, such that the negative

relationship between pay dispersion and

performance in the presence of high

interdependence was attenuated by high use of

individual incentives.

Shen et al. (2010) Executives of large firms Vertical Pay ratio CEO turnover CEOs that have a higher percentage of pay

compared to other members of the top

management team were less likely to turnover.

Shin (2009) Manufacturing firms Vertical Gender

heterogeneity;

race

heterogeneity;

proportion of

recently hired

workers; job

rotation program;

self-managed

teams

Pay dispersion Pay variation was positively related to gender

heterogeneity, proportion of recently hired

workers, and job rotation programs. Pay

variation was negatively related to the use of

self-managed teams.

Siegel and Hambrick

(2005)

Executives Overall; vertical;

horizontal

Pay dispersion Firm performance The relationship between TMT pay variation and

firm performance was negative in high

technologically intensive firms.

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Simmons and Berri

(2011)

NBA teams Horizontal Pay dispersion Individual and team

performance

Justified pay variation had a positive relationship

with both team and individual performance.

Sommers (1998) NHL teams Horizontal Pay dispersion; pay

level

Team performance Pay variation and team points were negatively

related.

Su (2011) Executives of public firms

(China)

Vertical; overall Job level; risk;

number of

competitors

Pay range and

dispersion; pay

level

Pay variation was greater when there was a greater

number of contestants and business risk. Pay

levels and pay variation were related to board

composition and independence.

Sunday and Pfuntner

(2008)

BLS national compensation

survey

Horizontal Occupation; private

vs public; work

level; pay level;

industry; firm size;

union presence;

incentive pay

Pay range Pay variation within a firm was related to work

level, pay level, industry, firm size, unionization,

and incentive pay.

Sunde (2009) Professional tennis Horizontal Heterogeneity of

ability; prize

differential

Stronger athlete win Effort exertion was greatest in homogeneous

contests.

Tao and Chen (2009) Firms (Taiwan) Vertical Technology-related

employment

Pay range Firm-specific technology and pay variation were

positively related.

Trevor and Wazeter

(2006)

Teachers Horizontal Pay dispersion Pay equity

perceptions

The pay dispersion and pay equity perceptions

relationship was positive for those high in pay

standing and negative for those low in pay

standing.

Trevor et al. (2012) NHL teams Horizontal Predicted pay; pay

residuals

Team performance Pay variation related to inputs was positively

related to performance in an interdependent

setting.

Tsou and Liu (2005) Manufacturing firms (Taiwan) Overall Pay residual; flexible

wage structures

Job reallocation;

excess turnover;

low quality

turnover

Higher excess turnover was related to more

compressed wage structures. Plants with greater

flexibility in wage structures exhibited greater

turnover rates among low quality employees.

Venkatesh,

Challagalla, and

Kohli (2001)

Sales units Horizontal Heterogeneity in

demographic

characteristics,

skills, rewards,

and goal

orientations

Job satisfaction; sales

unit performance

Reward dispersion was positively related to

performance and unrelated to satisfaction.

Gender dispersion was positively related to

satisfaction but negatively related to

performance.

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Wade et al. (2006) Executives and managers Vertical CEO under or over

payment; CEO

power; internal

and external

equity

Executive

compensation;

turnover

CEOs appeared to influence wage-setting for their

employees, Internal and external inequities were

related to higher turnover rates.

Werner and Ones

(2000)

MBA students Horizontal Performance

differences;

seniority

differences; gender

differences

Perceived pay

inequities

Performance and seniority differences of

comparison others led to feelings of pay inequity

when pay was the same. Feelings of inequity

were reduced when pay systems were explained.

Winter-Ebmer and

Zweimuller (1999)

Firms (Australia) Overall; horizontal Pay residual Productivity Pay variation had an inverse U-shaped relationship

with productivity for white-collar workers. The

pay variation and performance relationship was

more linear for blue-collar workers.

Wright et al. (2005) Executives Vertical; horizontal Pay ratio Firm performance Vertical pay variation and performance were

negatively related in focused firms, but positively

related in less focused firms. Vertical options pay

variation was positively related to performance.

Horizontal pay variation was negatively related

to performance.

Wu et al. (2011) Firms (China) Overall Organizational

tenure diversity;

age diversity;

educational

background

diversity

Strategic change The positive relationship between TMT diversity

and strategic change was moderated by TMT

pay variation (dispersion weakened the effect).

Yanadori and Cui

(2013)

Research and development

employees in high-tech firms

Horizontal Pay dispersion;

financial slack

Innovation Pay dispersion was negatively related to

innovation. This relationship was weakened by

increases in financial slack.

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samantha a. conroy, nina gupta, jason d. shaw and tae-youn … · 2014-08-11 · review is brief,...

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