Contingencies in the Effects of Pay Range on Organizational Effectiveness

Abstract

The degree of pay spread can influence many organizational level outcomes (e.g., workforce productivity and organizational performance), but empirical studies are inconsistent about the directionality of the effect. We argue that it is not simply the width of the pay range but also the factors responsible for the width that explain the effects of the pay range on employee and organizational outcomes. We expect that when wider pay ranges are attributable to the use of performance-based pay, the effects of the pay range on performance are positive, but narrower pay ranges attributable to performance-based pay reduce this effect substantially. By contrast, wider pay ranges attributable to politically based pay should have negative effects on performance, and this effect should be weakened when the pay ranges are narrower. Data from a sample of motor carriers generally support our predictions. Although wider pay ranges have positive effects, the results reveal a complex pattern of relationships among the basis of pay allocations and pay range width on the one hand and workforce productivity and organizational performance on the other. Implications for future compensation and strategic human resource management research are discussed.

Pay Dispersion

“…Other findings such as a robust and positive meta-analytic correlation between financial incentives and individual performance levels (Jenkins et al 1998) and evidence that pay differentials must be large to be considered meaningful also indirectly support this premise (Mitra et al 1997). Even equity theory (Adams 1963) can be used to ground the expectation that pay dispersion will result in better performance, to the extent that the outcomes match commensurate input levels (Kepes et al 2009, Shaw et al 2002, Trevor et al 2012.…”

“…There are any number of factors that may play a role in determining the nature of the direct relationship, including sample characteristics, type of dispersion, and the set of control variables used, to name a few. But, studies during the time period reviewed here have brought much greater clarity when one considers whether the observed pay dispersion either can be explained by legitimate factors such as individual incentives, seniority, education, or tenure (Kepes et al 2009, Shaw et al 2002, Shaw & Gupta 2007 or is the result of legitimate worker inputs such as historical performance (Fredrickson et al 2010, Trevor et al 2012. Like in every area of study, some messy findings appear in the literature, but the preponderance of the evidence suggests that explainable or legitimate pay dispersion is generally positively related to organizational productivity and safety, team performance, and individual performance.…”

“…At this juncture, I believe it is time for researchers to move beyond the notion of interdependence and investigate what I believe is the key underlying issue: the identifiability of individual work inputs. Nearly all work has some degree of interdependence-the Kepes et al (2009) and Shaw et al (2002) trucking samples are rare exceptions in terms of the near-complete independence of work efforts. In many, but not all, interdependent and teamwork situations, the nature of individual contributions can be reasonably observed and accurately assessed.…”

“…But, like the authors of several other studies in the literature, these authors may have inadvertently removed explainable or justifiable sources of dispersion in their analyses, leaving only residual, non-performance-based variation. If so, then these results should be placed along the recent wave of studies of explained variation in pay (e.g., Eriksson 1999, Kepes et al 2009, Shaw et al 2002. The Trevor & Wazeter (2006) (negative relationship between pay dispersion and pay equity attitudes) and Clark et al (2009) (positive relationship between pay spread and satisfaction) studies show opposing effects on attitudes.…”

“…In a follow-up study of long-haul trucking organizations, Kepes et al (2009) again addressed the issue of explained or legitimate pay variation and organizational performance. Using equity theory and fairness-based perspectives to ground their predictions, they argued that pay spread among drivers would be positively related to performance when performance-based pay was high [a replication of the Shaw et al (2002) prediction], but would be negatively related when politically based pay was high.…”