Wage Compression and Symbolic Egalitarianism

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An organisations internal pay structure can affect the way employees perform to the business strategy. Where a workers performance not only depends on the level of pay they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same occupational group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues that wage compression, which is the act of reducing the size of the pay differences among employees, improves productivity. To gain competitive advantage, organisations need to acknowledge not only hierarchical wage compression (between management and employees) but also the differences between individuals at similar levels. Narrowing pay discrepancies in a team-based environment promotes a sense of community and a common fate, leading to greater efficiency as it lessens interpersonal competition but increases collaboration (Pfeffer, 2005). Pay compression thus advocates equity theory; that if internal factors and external competitiveness are aligned, employees perceive their pay to be fair and exert maximum effort (Milkovich, Newman, Gerhart, 2011).

From this perspective, compressed pay is seen as a motivational tool to incentivise workers due to the fact that there is no added value for an individualistic nature, but rather a collective tendency. Pfeffer (2005) also argues that wage compression helps to de-emphasise pay. This in turn creates employees who are not driven by pay but value organisational attributes like the people as well as having work that is exciting and rewarding to them. By equalising pay, it draws attention to intrinsic forms of motivation. If pay is less salient, it means motiva...

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Hibbs, D., & Locking, H. (2000). Wage dispersion and productive efficiency: Evidence for Sweden. Journal of Labor Economics 18, 755–782.

Kraft, K. (1994). Wage differentials between skilled and unskilled workers. Weltwirtschaftliches Archiv, 130(2), 329-349.

Lallemand, T., Plasman, R., & Rycx, F. (2004). Intra-firm wage dispersion and firm performance: Evidence from linked employer-employee data. Kyklos, 57, 533-558.

Lazear, E. (1989). Pay equality and industrial politics. The Journal of Political Economy, 97 (3), 561-580.

Milkovich, G., Newman, J., & Gerhart, B. (2011). Compensation (10th ed.). Singapore: McGraw-Hill.

Pfeffer, J. (2005). Producing sustainable competitive advantage through the effective management of people. Academy of Management Executive, 19 (4), 95-108.

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