Does Reducing Pay Dispersion Increase Lower-Paid Employee Effort?

• In Event: Accounting Behavior and Organizations 1

Abstract

Prior research suggests that pay dispersion among employees can cause the lower-paid employees to feel unfairly treated and to reduce their effort accordingly. Recently, some firms have actively reduced pay dispersion in an attempt to mitigate such negative effects. Using an experiment, we find that reducing pay dispersion by raising the lower-paid employees’ wages can increase their effort by increasing their perceptions of pay fairness. Further, we show that it is the reduction in pay dispersion rather than merely the increase in the lower-paid employees’ wages that leads to the increase in perceived fairness and the resulting increase in effort. Our results suggest that reducing pay dispersion can increase lower paid employees’ effort, and that firms should consider whether this benefit is worth the extra cost they incur by paying higher wages.

Authors

• Conor Brown, University of Pittsburgh

• John H Evans III, University of Pittsburgh

• Donald V Moser, University of Pittsburgh

• Adam Presslee, University of Pittsburgh