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The effect of horizontal pay dispersion on the effectiveness of performance-based incentives

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  • Grabner, Isabella
  • Martin, Melissa A.

Abstract

In response to general calls for increased transparency in society, pay transparency policies are growing in importance. Given that pay transparency unavoidably gives employees the opportunity to make comparisons between themselves and others, in this study we address the question of how these comparisons impact the incentive effects of performance contingent pay, and consequently their performance outcomes. Specifically, we empirically examine whether horizontal pay dispersion alters the effectiveness of performance-based pay contracts, which firms typically use to incentivize effort. Exploiting our unique access to a large healthcare provider, we document the moderating role of horizontal pay dispersion on the effectiveness of individual monetary incentives at generating increased individual performance. To provide a more nuanced understanding of the moderating effect of pay dispersion, we further examine the boundary conditions of the proposed interaction. In particular, we examine the differential effect of overall pay dispersion on employees that rank high versus low in the pay distribution and disaggregate overall pay dispersion into performance-related versus performance-unrelated pay dispersion. Our findings consistently show a positive moderating effect of pay dispersion when employees are more likely to consider the observed pay dispersion as legitimate, and a negative moderation effect when this is less likely the case. Our study strengthens the understanding of how individual level incentives function in the context of a multi-person firm setting. Our results document that individual incentives are effective, but also suggest that pay dispersion can have a significant influence on the incentive-performance relation. These findings provide some evidence that individuals are concerned not only with their own payout, but also with that of others, and that this concern has a significant impact on individual’s effort provision, and consequently performance.

Suggested Citation

  • Grabner, Isabella & Martin, Melissa A., 2021. "The effect of horizontal pay dispersion on the effectiveness of performance-based incentives," Accounting, Organizations and Society, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:aosoci:v:88:y:2021:i:c:s036136822030060x
    DOI: 10.1016/j.aos.2020.101174
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    3. Ndatenyirigira Joseph, 2023. "Financial Statements Analysis and Financial Performance of Commercial Banks in Rwanda," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(3), pages 807-824, March.
    4. Chux Gervase Iwu & Emmanuel Udekwe & Andre Charles de la Harpe & Justin Olawande Daramola, 2021. "Descriptive literature review of human resource information systems (HRIS) adoption issues in the health sector, South Africa," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(5), pages 261-275, July.
    5. Irfah Najihah Basir Malan & Lyu Yingkun & Halim Shukri Kamaruddin, 2023. "A Systematic Review on the Executive Compensation Gap and Its Multiple Impacts on the Company," Information Management and Business Review, AMH International, vol. 15(4), pages 284-298.
    6. Eva Labro & James D. Omartian, 2023. "Managing Employee Retention Concerns: Evidence from U.S. Census Data," Working Papers 23-07, Center for Economic Studies, U.S. Census Bureau.
    7. Arnold, Markus C. & Artz, Martin & Tafkov, Ivo D., 2024. "The effect of target transparency on managers’ target setting decisions," Accounting, Organizations and Society, Elsevier, vol. 112(C).

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