The Strength of Performance Incentives, Pay Dispersion, and Lower-Paid Employee Effort
AAA 2017 Management Accounting Section (MAS) Meeting
2017 Canadian Academic Accounting Association (CAAA) Annual Conference
41 Pages Posted: 12 Jan 2016 Last revised: 6 Jun 2022
Date Written: April 1, 2022
Abstract
The strength of performance incentives differs for employees within an organization. We describe how differences in incentive strength can lead to pay dispersion because employees facing stronger incentives work harder and earn more pay than those facing weaker incentives. We then conduct four experiments examining how the lower-paid employees respond to such pay dispersion. Consistent with our hypothesis derived from referent cognitions theory, we find that such pay dispersion decreases the lower-paid employees’ perceived fairness and thus their effort. These results hold whether the employees are assigned to or self-select into the job with weaker incentives and whether they have more explicit or less explicit information about the economic rationale for the difference in incentive strength. Our findings are inconsistent with conventional economic reasoning and refine the conclusions from prior pay dispersion studies. The robustness of our results demonstrates their generalizability to a range of actual employment settings.
Keywords: effort; fairness; pay dispersion, performance incentive strength.
JEL Classification: M41, M52, M55
Suggested Citation: Suggested Citation