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Received 1 November 1999
Final revision received 25 October 2001
Key words: compensation; organizational performance; dispersion
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 (c) 2002 John Wiley &Sons, Ltd.
Effective strategy implementation demands a synergistic amalgam of organizational processes and systems; i.e., congruence is necessary to ensure that organizational elements work together to promote strategic goals. Most theories extol the virtues of congruence; few empiricists explore the issue systematically. An organization's compensation system is arguably the most significant human resource management system for effective strategy implementation (Montemayor, 1996), particularly in view of the enormous costs that a compensation system entails. Compensation researchers and practitioners alike posit that pay structures, particularly pay dispersion vs. compression, have critical implications for strategy implementation and organizational performance (e.g., see Lawler,1981). But is pay more strategically valuable or more effective when it is widely dispersed or compressed? This question spurs theoretical disagreement (Bloom, 1999; Pfeffer and Langton, 1993), providing little resolution to the conditions under which widely dispersed or tightly compressed compensation systems result in superior strategy implementation. This study is designed to begin answering the question theoretically and empirically.
Specifically, this research addresses several notable omissions in the pay dispersion/strategy implementation literature. One, we view pay dispersion as effective, not across the board, but under certain organizational contingencies. Thus, we define theoretically the conditions under...