Why Does Large Vertical Pay Dispersion Increase Turnover Among Both Employees and Senior Managers?

ABSTRACT This study examines the complex relationship between vertical pay dispersion (i.e., pay disparities across different organizational levels) and employee turnover by integrating insights from tournament theory and equity theory. While vertical pay dispersion is designed to incentivize career advancement, we argue it can simultaneously elevate turnover at all levels by fostering competition and inequity. Based on data collected from 302 firms in the Great Bay Area (Guangdong Province in Mainland China, Hong Kong, and Macao), our results show that greater vertical pay dispersion increases turnover for senior managers as well as lower‐level managers and employees. Inconsistent with tournament logic, we find that the detrimental effect of vertical pay dispersion on turnover is not significantly weaker for senior managers who benefit from the dispersion than for lower‐level managers and employees. Drawing on equity theory, we further investigate the moderating role of high‐investment human resource systems (HIHRS), which reflect an organization's fair treatment of employees. Results support the hypothesis that the coexistence of high vertical pay dispersion and high HIHRS within a firm increases both employee and senior manager turnover, as these practices send conflicting signals about organizational priorities and equity. These findings contribute to compensation literature by unfolding the contingent and differential effects of pay structures on turnover across hierarchical levels and organizational contexts.