When inequality means equity: horizontal wage dispersion and the propensity to leave current employment across different organizational settings

Abstract

Extant research holds that horizontal wage dispersion (i.e., wage dispersion within a hierarchical level in a firm) induces employees to leave their employment. Based on social comparison theory, we nuance this by theoretically and empirically uncovering contingencies under which horizontal wage dispersion is associated with employees staying in their current employment. Specifically, we focus on firm size and decentralization as relevant organizational contingencies. In large as opposed to small firms, employees’ productivity may vary significantly within hierarchical levels, causing employees to consider high horizontal wage dispersion as equitable. In decentralized firms, there is more delegation of responsibilities to employees at lower levels in the hierarchy, creating more room for individual differentiation in terms of contributions and thus legitimizing horizontal wage dispersion. Our empirical analysis based on matched employer–employee data from Denmark strongly supports our predictions. Our study reveals the organizational contingencies where horizontal wage dispersion can be used as a retention tool.