Intra-establishment Pay Inequality and Performance Effects in Comparative Perspective

Using a harmonized, linked employer-employee data set for Belgium, Denmark, Ireland, Italy, and Spain, we test the hypotheses of tournament and equity theory as they concern the relationship between intra-organizational pay inequality and organizational performance. In addition to mapping descriptively cross-country differences in this area, we explore the mediating impact upon this relationship of differing country constellations of work organization and labour market institutions. For lack of suitable performance microdata, we are forced to construct a proxy for organizational performance from wage data. We corroborate the validity of this proxy at the aggregate level by comparison with independently collected productivity data. We also address the potential simultaneity problem inherent in our empirical approach by use of 2SLS, although we are only able to take this step in Belgium. Our findings tend to support the viewpoint of tournament over equity theory, regardless of country context. In parallel, though, we present evidence that the incentive impact of greater intra-organizational inequality turns negative beyond a certain point. Lastly, the relative strengths of the wage inequality-performance nexus across countries is consistent with analogous variation in work organization and wage bargaining institutions.