Pay Dispersion and Firm Performance

Executive Compensation
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Jaap de Jonge
Editor, Netherlands

Pay Dispersion and Firm Performance

Pay dispersion refers to the difference in compensation between or within organizational level. More specifically it is the difference or "gap" in pay between a company's executives and the regular, rank-and-file employees (Axelsson and Ulander, 2017).

The extent to which pay disparity does or does not affect company performance is subject of ongoing theoretical and practical debate:
  • According to Tournament Theory employees compete with each other in a tournament in which the prize is promotion and higher pay (Lazear and Rosen, 1981). In this context, higher pay dispersion increases the employees will to win, and therefore motivates them to work harder.
  • According to Equity Theory (Cowherd and Levine, 1992) and Relational Deprivation Theory (Martin, 1981), a high level of pay dispersion might lead to a feeling of unfairness among the employees which reduces their work efforts.
Pay dispersion is also called: Earning or Wage Variation / Inequality / Gap / Disparity / Discrepancy / Differential.
Axelsson, J., Ulander, E., 2017. Does pay dispersion affect firm performance? A study of publicly traded Swedish firms, Master’s Thesis, Uppsala University.
Cowherd, D.M., Levine, D.I., 1992. Product Quality and Pay Equity Between Lower-Level Employees and Top Management: An Investigation of Distributive Justice Theory. Adm. Sci. Q. 37, pp. 302–320.
Lazear, E.P., Rosen, S., 1981. Rank-Order Tournaments as Optimum Labor Contracts. J.
Polit. Econ. 89, pp. 841–864.
Martin, J., 1981. Relative Deprivation: A Theory of Distributive Injustice for an Era of Shrinking Resources, in: In L.L Cummings & B.M. Staws (Eds.), Research in Organizational Behavior. CT: JAI Press, Greenwich, pp. 53–107.

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