Pay dispersion and the financial performance of the firm: evidence from Korea

Abstract

Pay dispersion has been found in prior research to negatively affect both individual and workplace performance. In this study, we examine whether the relationship between horizontal pay dispersion and firm financial performance is curvilinear in nature, with moderate levels of dispersion leading to more positive outcomes than either low or high levels. Using data from a government-sponsored survey of Korean firms, we find support for the hypothesized curvilinear relationship between pay dispersion and firm financial performance. We further find that this curvilinear relationship is moderated by firm and human resource system characteristics. Where the firm had more incumbents in the rank being examined, where pay level was higher, and where there was greater organizational investment in performance evaluation and feedback, the positive slope (within the curvilinear relationship) inverted at a higher level of dispersion.

Keywords:

• incentive intensity
• pay dispersion
• pay-for-performance efficiency
• strategic pay

Acknowledgments

The authors thank the anonymous reviewer for helpful comments on their earlier draft of this article and the Korea Research Institute for Vocational Education and Training for allowing them to use their dataset. This research was sponsored by a research grant from the Yonsei Management Research Center.