Pay dispersion (main driver of inequality) promotes innovation

This study unpacks two mechanisms through which pay dispersion affects organizational innovation by examining the mediating roles of employee participation and voluntary turnover. We found that pay dispersion has an inverted U-shaped effect on employee participation, which in turn promotes organizational innovation. We also found that pay dispersion has a positive effect on employee voluntary turnover, which in turn impedes organizational innovation.

Theoretical contributions and implications

In organizations, economic inequality mainly plays out in the form of pay dispersion. This study sheds new light on the positive and negative effects of pay dispersion on organizational innovation. With a solid foundation of prior research establishing the relevance and importance of pay dispersion on organizational outcomes, we join a small but growing number of scholars seeking to investigate the mechanisms linking pay spreads and organizational innovation. By incorporating pay dispersion, employee participation and voluntary turnover, and organizational innovation into one model (see Figure 1), this study provides evidence for the theoretical rationale that pay dispersion influences organizational innovation through employees’ behaviors. We find that the percentage of participatory employees has a strongly positive effect on innovation, indicating the importance of engaging many employees in a firm’s innovation processes and activities. We also find that voluntary turnover has an overall negative effect on innovation. Thus, both participation and turnover are important mechanisms through which pay dispersion influences organizational innovation.

Although we hypothesized a curvilinear relationship between pay dispersion and voluntary turnover, our analyses revealed a positive, linear association. This result implies that a low level of pay dispersion does not necessarily lead to voluntary turnover. One possible explanation is that employees who believe they have contributed more than others but have not been paid accordingly may seek a sense of justice by simply reducing their efforts rather than leaving the firm. Another possibility is that they may have received non-monetary rewards (e.g. flexible work hours, paid club memberships and generous vacation entitlement), which can offset their perceived pay inequity owing to low pay dispersion.

Our findings illustrate the effects of inequality in a nuanced fashion by showing how relative pay dispersion affects the relationship between intra-organizational pay dispersion and organizational innovation through employee voluntary turnover. Consistent with the arguments that social comparison occurs within and across firms, our results support the moderating role of relative pay dispersion in the association between internal inequality and voluntary turnover. This finding stresses that the effect of inequality within an organization is subject to the influence of inequality within a broader context (an industry, a region or even a country).

Managerial implications

From an innovation perspective, this study offers meaningful implications for managers. There is little knowledge about how pay dispersion affects organizational innovation. Yanadori and Cui (2013) report a weak correlation between pay dispersion and innovation, although their regression analysis indicates that pay dispersion may have a negative effect on innovation. Our results suggest that the relationship between pay dispersion and organizational innovation is likely to be inverted U-shaped (see Equation 7). Below a certain level, a firm’s pay dispersion enhances its innovation. This positive effect is made possible through employee participation, suggesting that a firm should engage employees to provide novel suggestions and ideas for product and process innovations. For example, managers can include innovation contribution as a dimension of performance appraisal to reward the suggestion and adoption of new ideas (Arthur and Aiman-Smith, 2001).