Organizational-Performance Pay and Compensation Dispersion

Abstract

We document the performance implications of compensation dispersion under organizational-performance pay, a scheme where individual compensation consists of a pre-designated share of rewards contingent on organizational performance. We examine the field setting of professional eSports athletes facing an exogenous change in the distribution of shares of team-based rewards. We find that unequal, heterogeneous share dispersion—relative to equal, homogeneous compression—results in lower organizational performance. While share dispersion aligns the incentives of high-share individuals with the organization’s—motivating them to contribute more—it also engenders unfavorable social comparison among low-share individuals—demoralizing them into contributing much less. A complementary controlled experiment validates the findings and demonstrates that organizational-performance pay, relative to other payment schemes, exacerbates the consequences of dispersion, especially when reward-sharing is cognitively salient.