Topic: Compensation, Job Performance
Publication: Personnel Psychology (AUTUMN 2009)
Article: Contingencies in the effects of pay range on organizational effectiveness
Authors: S. Kepes, J. Delery, and N. Gupta
Reviewed By: Benjamin Granger
While pay variability among employees may signal to the workforce that the organization values and rewards good performance; it may also signal inequity and unfairness. From an economic perspective, it makes sense to pay for performance, but from a justice perspective, pay differentials may signal unfairness, which can lead to competition, decreased commitment, and dissatisfaction.
So which is it: Does pay variability among employees enhance or damage performance? A recent study by Kepes, Delery and Gupta (2009) suggests that the reason for the pay variability helps clear these muddy waters.
Indeed, pay variability among employees in the same position can occur for many different reasons (e.g., merit-pay, organizational politics, seniority) and Kepes et al.’s findings suggest that the relationship between pay variability and organizational performance depends on the reason for the pay variability.
Kepes et al. obtained data from HR supervisors of 326 different motor carrier organizations. They found that pay variability has a favorable relationship with productivity when pay is based on performance. However, when pay was reported as not performance-based, pay variability had a negative influence on productivity.
Notably, low levels of productivity were associated with organizations whose pay range was large and where the pay was reported as being politically-based (i.e., as a result of “brown nosing”, looking out for friends). Poor productivity was also evident when a performance-based pay system was used but the actual pay range was small.
So it seems that pay variability among employees within the same position can both benefit and damage productivity. A key determinant is why the pay variability exists. Interestingly, Kepes and colleagues conclude that when performance-based pay systems are used, there should be meaningfully large pay distinctions among employees.