Pay dispersion and workforce performance: moderating effects of incentives and interdependence

The compensation literature is replete with arguments, but lacking in empirical tests, regarding the effects of pay dispersion on organizational outcomes. Pay dispersion may increase effort and provide incentives for high workforce performance levels, but may also inhibit cooperation and goal orientation among employees. Drawing on several theoretical perspectives (individual motivation, institutional theory, organizational justice, and neoclassical economics), this study predicts that pay dispersion will be associated with higher levels of workforce performance when accompanied by formal individual incentive systems and independent work, while pay compression is desirable in the absence of individual incentive systems and when work is interdependent. Survey research studies in two industrial sectors (the motor carrier and concrete pipe industries) were conducted to address these issues. Interactive regression results were generally supportive of the predictions across several measures of workforce performance (accident rates, safety violations, and productivity). Implications of these studies for strategy implementation in terms of compensation theory and practice are addressed. Copyright © 2002 John Wiley & Sons, Ltd.