Boundary Condition of Sorting: How Collective Pay-for-Performance Constrains the Moderating Effect of Individual Pay-for-Performance on the Turnover–Performance Relationship

Abstract

Existing research on compensation suggests that individual pay-for-performance (PFP) induces the sorting effect, enhancing firm performance. The sorting effect promotes the redistribution of employee performance by increasing the retention of high performers and increasing the turnover of poor performers. However, little is known about the moderating effect of individual PFP on the relationship between collective turnover and firm performance. Integrating insights from collective turnover and compensation research, this study proposes that individual PFP's sorting effect can reduce the negative impact of collective turnover on firm performance under certain contexts. Using nationally representative panel data on Korean firms, this study found that individual PFP reduces the negative relationship between collective turnover and firm performance only in the absence of collective PFP. However, this research has also found that the simultaneous utilization of individual and collective PFPs exacerbates the negative impact of collective turnover on firm performance. These findings offer novel insights into using diverse incentives in managing the performance effects of collective turnover.