Pulling in different directions? Exploring the relationship between vertical pay dispersion and high‐performance work systems

• Date: 01 January 2018
• Author: Jake G. Messersmith,Kyoung Yong Kim,Pankaj C. Patel
• Published date: 01 January 2018
• DOI: http://doi.org/10.1002/hrm.21846

HR SCIENCE FORUM

Pulling in different directions? Exploring the relationship

between vertical pay dispersion and high-performance work

systems

Jake G. Messersmith

1

| Kyoung Yong Kim

2

| Pankaj C. Patel

3

1

University of Nebraska-Lincoln, Lincoln,

Nebraska

2

City University of Hong Kong, Kowloon,

Hong Kong

3

Villanova School of Business, Villanova

University, Villanova, Pennsylvania

Correspondence:

Jake Messersmith, Associate Professor of

Management, University of Nebraska–Lincoln,

1240 R Street, Lincoln, Nebraska 68588.

Email: jmessersmith2@unl.edu.

Vertical pay dispersion (VPD), a hierarchical pay structure used to motivate employees, has tra-

ditionally been studied separately from high-performance work systems (HPWSs). As a compo-

nent of HPWSs, incentive-based compensation schemes focus on employee- or team-level

incentives. However, the influence of the simultaneous utilization of VPD and HPWS on per-

formance remains understudied. This study addresses the question of whether these

approaches to managing human capital serve as complements or substitutes to one another.

VPD and HPWS are argued to substitute for one another with respect to motivation- and skill-

enhancing practices. The opposite notion is true in regard to opportunity-enhancing HPWSs,

which serve to amplify the effectiveness of VPD. In a multisource, longitudinal sample of South

Korean firms, the hypothesized predictions are supported.

KEYWORDS

contingency theory, high-performance work systems, strategic HRM, tournament theory,

vertical pay dispersion

1|INTRODUCTION

Pay dispersion refers to the pattern of pay differential across and

within different levels of the organizational hierarchy (Bloom, 1999;

Bloom & Michel, 2002; Messersmith, Guthrie, Ji, & Lee, 2011; Milk-

ovich & Newman, 2005). Vertical pay dispersion, in particular,

focuses on the disparity in pay across different levels in the organi-

zation (Cowherd & Levine, 1992; Kepes, Delery, & Gupta, 2009).

Vertically dispersed pay structures have received significant criticism

in the literature for creating a culture of competition, feelings of

relative deprivation (Crosby, 1976), and concern that they suppress

teamwork and collaboration (Akerlof & Yellen, 1988; Ferraro, Pfef-

fer, & Sutton, 2005; Levine, 1991; Pfeffer & Langton, 1993). How-

ever, VPD also provides tournament-type payoffs, and the efficacy

of such systems is broadly supported in labor economics (Lazear &

Rosen, 1981). In fact, VPD is a viable incentive tool among many

firms across multiple sectors and remains an efficacious tool to seek

and allocate talent by facilitating sorting among employees

(Gerhart & Fang, 2014). As such, vertically dispersed pay structures

remain the modal system in many industries and organizations

(Connelly, Tihanyi, Crook & Gangloff, 2014; Conyon, Peck, & Sadler,

2001; Eriksson, 1999).

In approaching the topic of VPD, we adopt the view espoused by

Shaw (2014) in noting “the legitimacy and justifiability of pay disper-

sion”(p. 534). Such a view acknowledges that pay dispersion is

neither universally beneficial nor detrimental, but that the effect of

dispersed pay structures is contingent on a host of internal and exter-

nal factors. Therefore, while the theorized organizational benefits of

VPD are contingent upon proper implementation, they are possible

given proper alignment with other system characteristics (Shaw,

2014; Trevor, Reilly, & Gerhart, 2012).

As firm-level practices, both VPD and HPWSs aim to increase

employee ability and motivation, ultimately in an attempt to improve

firm performance. HPWSs also aim to enhance the ability and motiva-

tion of human capital while unlocking opportunities for employees to

demonstrate their talent (Appelbaum, Bailey, Berg, & Kalleberg, 2000;

Jiang, Lepak, Hu, & Baer, 2012). HPWSs include a complete menu of

human resource practices ranging from extensive recruitment and

selective staffing to intensive training and development programs,

performance evaluation, merit-based pay, and employee participation

DOI: 10.1002/hrm.21846

Hum Resour Manage. 2018;57:127–143. wileyonlinelibrary.com/journal/hrm © 2017 Wiley Periodicals, Inc. 127

programs (Huselid, 1995; Takeuchi, Lepak, Wang, & Takeuchi, 2007).

Therefore, HPWSs represent an integrated approach to acquiring and

managing human capital, while VPD focuses on building a promotion

and compensation structure that serves to signal, sort, and incentivize

employees, apart from other HRM elements.

This raises a natural question regarding the interplay between

these two sets of practices and whether they enhance or detract

from one another. Although the effects of VPD on performance are

mixed and widely debated, we ask whether HR practices may com-

plement or hinder the efficacy of VPD in influencing firm perfor-

mance. Both VPD and HPWS aim to improve the human capital

available to the firm. VPD focuses on building hierarchical pay struc-

tures with strong incentives for individuals to “compete”for promo-

tions up the organizational ladder, where the gap between pay

levels increases disproportionately with each successive promotion.

The logic suggests that steep corporate tournaments attract bright

and talented employees who are then motivated to apply their

talent in order to receive substantial rewards as they move up the

corporate ladder (Lazear & Rosen, 1981). Hierarchical pay structures

are also viewed as a tool to efficiently allocate risk. As individuals

rise in the hierarchy, they face greater risk and their compensation

is generally more variable. This allows the organization to shift risk

to employees, while also allocating significant rewards to those at

the top of the hierarchy who bear the greatest risk (Nalbantian,

Guzzo, Kieffer, & Doherty,2003).

Bridging the two streams of literature—VPD and HPWSs—we

build upon the growing work in both areas to better understand the

relationship between vertically dispersed pay structures and HPWSs.

Specifically, we address the theoretical mechanisms through which

both VPD and HPWSs operate to affect performance to determine if

VPD and HPWSs complement one another or substitute for one

another. We specifically note the underlying differences in VPD and

HPWS, as VPD theoretically injects competition within the firm, while

HPWSs are espoused to produce collaboration. We further discuss

the redundancies that may be created when simultaneously utilizing

VPD and HPWSs. By invoking two systems to achieve one result, the

organization may be creating cost inefficiencies that place it at a com-

petitive disadvantage. We highlight the tension between these two

forces both theoretically and empirically. Further, the system of high-

performance work practices is decomposed to test the interactive

effects of VPD and skill-, motivation-, and opportunity-enhancing

HPWSs on the above-mentioned performance variables. This is an

important area of inquiry, as many organizations simultaneously

leverage hierarchical pay structures and HPWSs. Determining

whether this results in an optimal combination for firm performance

is a question of theoretical and practical significance.

This article contributes to the management literature in a num-

ber of ways. Most notably, it builds upon strategic HR research

focusing on the configurational and contingent nature of manage-

ment practice implementation (Delery & Doty, 1996; Huselid &

Becker, 2010; Lepak & Shaw, 2008). While both VPD and HPWSs

have been demonstrated to offer beneficial organizational outcomes,

they may not necessarily work well together to produce desired

behavioral effects. Therefore, the article addresses a practically

meaningful question in attempting to understand the challenges

associated with integrating HPWSs into vertically dispersed pay

structures. Addressing this tension within the system and untangling

the motivational properties of each add value to the literature and

guidance to practice. While existing work has examined the influ-

ence of pay dispersion in combination with other characteristics of

the compensation system (Shaw, Gupta, & Delery, 2002), to our

knowledge no study to date has attempted to disentangle the

effects of pay structure choices as combined with a “typical”HPWS.

The results have clear policy implications for firms seeking to assess

gains from a hierarchically dispersed pay structure and the imple-

mentation of other skill-, motivation-, and opportunity-enhancing

HR practices.

Second, we examine the more nuanced relationships between

HPWSs and VPD by investigating the manner in which VPD interacts

with the three subsystems of HPWSs related to skill, motivation, and

opportunity enhancement. This provides a more contextualized view

of the relationship between VPD and the key levers and mechanisms

within the HPWS. The results yield important information for both

scholarship and practice as it relates to the implementation of pay

structures and other management practices to achieve higher perfor-

mance. In doing so, the study also addresses a need for developing a

deeper understanding of the way in which individual HR practices

interact within the overall system of practices (Lepak & Shaw, 2008)

and examines connections between micro and macro models in the

field of HRM (Wright & Boswell, 2002). In particular, while the orga-

nizational sciences have begun to explore the micro-foundations of

competitive advantage (i.e., Abell, Felin, & Foss, 2008; Coff & Krys-

cynski, 2011), we add to this discussion by looking at the “macro-

foundations”of system alignment and fit.

Third, the article tests the propositions using a large, multiyear,

multisource sample of firms across multiple industries in South Korea.

The robustness of the data allows for meaningful comparisons across

organizations and chronological spacing between the measurement

of the independent variables and the dependent variables. While not

conclusive, the evidence provided herein offers guidance to scholars

and practitioners alike.

2|ATTRACTING AND MOTIVATING

HUMAN CAPITAL: VPD AND HPWS

At the root, both work on HPWSs and VPD have emphasized the

motivational elements of such practices. Pay dispersion research has

typically been built on the theoretical framework of tournament the-

ory. Tournament theory is a robust theoretical framework (see Con-

nelly et al., 2014, for a recent review) with an underlying thesis

pointing to the motivational value of disproportionate pay differences

in relation to peers. As such, tournament theory emphasizes the value

of steep pay hierarchies produced through contests in which organi-

zational actors compete for promotion and rewards (Lazear & Rosen,

1981). This theory views all promotions within the organization as

contests in which each individual employee is competing with others

at their same level for promotion to the next rung of the corporate

ladder. As one moves up the ladder, rewards become

128 MESSERSMITH ET AL.