Paying for Performance Can Attract Top Talent

by Charles Trevor Wednesday, February 29, 2012

Some management gurus argue that paying team members different amounts harms team performance, particularly when the task at hand requires that team members work closely together to get the job done. Differences in earnings can, according to conventional wisdom, fuel jealousy and create the perception of inequity between colleagues. Consequently, the argument is that considerable differentiation in pay damages employee attitudes, hinders cooperation, and thereby leads to lower team performance.

Our forthcoming article in the Academy of Management Journal calls into question these widely held assumptions. We examine the impact of “pay dispersion” (the extent to which pay level differs across team members) on team outcomes in our study of the National Hockey League, where team performance depends heavily on close cooperation between players. Our research indicates that, in fact, when organizations allocate pay based on employee contributions (e.g., performance), the organizations with high pay dispersion attract and retain larger numbers of top talent. This results in superior team performance. This “sorting” of individuals as a function of pay, surprisingly, had not been accounted for by management experts who predicted dire consequences for teams and organizations with high pay dispersion. We also clarify that the commonly cited problematic employee responses to pay dispersion arise primarily when pay is unrelated to individual contributions to the team, which few in management or academia would advocate.    

Does your company rely on employees to interact closely on core tasks? If your answer is “yes,” our research sheds light on a controversial compensation practice that may help you attract and retain top performers and build a winning team.