Pay Dispersion, Sorting, and Organizational Performance

The author takes a sorting perspective to explore relationships among pay dispersion, good- and poor-performer quit rates, and organizational performance in a multiwave study of independent grocery stores. Under high pay-for-performance, pay dispersion has a significant positive relationship with poor-performer quit rates and, further, the indirect effects of pay dispersion on organizational performance via poor-performer quit rates are stronger when pay-for-performance is high. The relationship between pay dispersion and good-performer quit rates is negative when pay-for-performance is low, such that the highest good-performer quit rates are found when pay is compressed and pay-for-performance is not used. Pay dispersion is also found to be directly and positively related to organizational performance among organizations that emphasize pay-for-performance. Implications for sorting theory and related perspectives are addressed and future research directions are outlined.