Fair Pay Has Positive Spillover: Park Research

When employees feel they are paid fairly in comparison to co-workers in similar jobs, they tend to believe that pay levels are fair throughout the organization, according to research by Associate Professor Tae-Youn Park.

Published by the Academy of Management Journal, “The Effects of Between-Group Pay Dispersion,” is a continuation of Park’s research on the impact of how pay level differences between employees affects employers and employees.

Why did you want to research this topic?

Previous studies have shown how pay levels differ between employees, called pay dispersion, affects organizational functioning. For example, a large pay dispersion between employees tends to harm organizational performance, but it can be a source of competitive advantage when the large dispersion can be explained by legitimate sources. Most of these studies, however, discuss the consequences of pay dispersion between employees within the same job groups.

What is less known is whether and how the way pay levels differ between employee job groups, such as how bank tellers versus direct sales representatives at a bank – affects employee interactions and organizational performance. On the one hand, the pay level differences between job groups may not matter much because their job values are “priced” differently in their own job markets. On the other hand, pay dispersion between them may matter because these groups interact closely with each other, requiring them to collaborate, and a large pay dispersion may hamper such interactions.

Hence, in this research, we investigated the consequences of a large versus small pay dispersion between groups, which we call between-group pay dispersion.

What are your key findings?

What we found in this research is that there is a spillover effect. That is, employees tend to form their perceptions of the fairness of pay differences between job groups based on the size of explainable pay level differences within their own work group. For example, if employees perceive a large pay dispersion within their group as justifiable due to significant performance differences among them, they tend to think that a large pay dispersion between job groups as justifiable, and vice versa.

In addition, we found that such a spillover effect of pay fairness perceptions form within groups and between groups can facilitate employees’ helping behavior between groups, which in turn significantly improves organizational performance.

What are the practical implications and potential impacts of this research?

Employers should acknowledge that the pay level differences between job categories is a critical strategic decision that affects people's integral helping behavior, as well as company performance.

It's not easy to give a full explanation to workers about why there are differences in pay between categories, so, employers should focus on achieving fair pay allocations between people within the same job. That will have a spillover effect, and then workers will think that the pay dispersion decisions are made in a fair way.