Authors:

• Katja Zajc Kejžar, University of Ljubljana, School of Economics and Business
• Nina Ponikvar, University of Ljubljana, School of Economics and Business

Keywords:

Pay dispersion | Employeee mobility | Firm performance | Sorting effect | Slovenia | J31 | J62 | D24 | L25 | M52 

Abstract

Purpose

This article investigates how intra-firm pay dispersion affects firm performance, distinguishing between vertical (across hierarchical levels) and horizontal (within occupational groups) pay differentials. It explores whether the impact arises from incentive effects for current employees or from the sorting effect through employee mobility, with a focus on managers and experts.

Design/methodology/approach

The study uses matched employer–employee microdata for Slovenian firms from 2006 to 2016. Firm performance is measured as value added per employee. Both static fixed-effects panel regressions and dynamic system Generalized Method of Moments (GMM) estimations are applied to disentangle direct (incentive) and indirect (sorting) effects of pay dispersion, while accounting for endogeneity and persistence in productivity.

Findings

The article finds robust evidence in both static and dynamic frameworks of a significant positive effect of horizontal pay dispersion among experts on firm labour productivity, driven by both incentive effects for current employees and sorting effects for prospective workers. The effect is amplified when the initial level of dispersion is lower. Evidence on vertical pay dispersion is less conclusive: while static results indicate a positive association mainly through incentives for current employees, the dynamic analysis does not confirm a causal link with productivity. Overall, the findings suggest that moderate pay dispersion – particularly among experts – enhances firm productivity without necessarily undermining equity in a low-inequality setting, whereas managerial turnover has the most adverse effects on performance.

Research limitations/implications

Results indicate that moderate pay dispersion can foster firm productivity without necessarily undermining equity in a low-inequality setting.

Originality/value

The article contributes by jointly examining vertical and horizontal pay dispersion, distinguishing between incentive and sorting effects, and contrasting outcomes for managers and experts. Using comprehensive linked employer–employee data allows for a rare large-scale test of compensation strategies and labour mobility in a low-inequality institutional context.

The Sustainable Development Goals (SDGs) addressed in the article are:

• SDG 8 – Decent Work and Economic Growth
• SDG 9 – Industry, Innovation and Infrastructure
• SDG 17 – Partnerships for the Goals

The article is published in:
International journal of manpower (Emerald)

The content is freely accessible at:

Intra-firm pay dispersion and firm performance: incentive for current or sorting of prospective workers