Organization-driven (Versus Market-driven) Pay Dispersion Effects

To reconcile the theoretical dilemma regarding pay dispersion (i.e., pay-level differences between employees), researchers have proposed that pay dispersion has positive effects when based on normatively acceptable or legitimate factors such as individual productivity differences. However, the prevailing focus on the sources of pay dispersion has left the strategic part of pay dispersion behind. By deviating from the degree of pay dispersion that is socially and normatively justifiable, a focal organization may practice pay dispersion to communicate its own strategic and cultural values. In this research, we argue that such deviation from the labor market, which we call organization-driven (versus market-driven) pay dispersion, can have positive effects when aligned with other management policies and practices. Drawing on the idea that pay dispersion effects occur through incentive (i.e., motivation enhancing) and sorting (i.e., re-composition of workforce) processes, we hypothesize that organization-driven pay dispersion effects become positive when the organization’s pay-for-performance (PFP) proportion is high and when average employee tenure is low. We further suggest that such benefits are realized when the organization’s capital intensity is low. We find support for our hypotheses using a 5-year (2015–2019) panel dataset of 130,010 employee-year observations in 799 organization-year observations from South Korean companies.