Intra-firm pay dispersion and firm performance: incentive for current or sorting of prospective workers

Katja Zajc Kejžar and Nina Ponikvar

International Journal of Manpower, 2026, vol. 47, issue 10, 133-151

Abstract: PurposeThis article investigates how intra-firm pay dispersion affects firm performance, distinguishing between vertical (across hierarchical levels) and horizontal (within occupational groups) pay differentials. It explores whether the impact arises from incentive effects for current employees or from the sorting effect through employee mobility, with a focus on managers and experts.Design/methodology/approachThe study uses matched employer–employee microdata for Slovenian firms from 2006 to 2016. Firm performance is measured as value added per employee. Both static fixed-effects panel regressions and dynamic system Generalized Method of Moments (GMM) estimations are applied to disentangle direct (incentive) and indirect (sorting) effects of pay dispersion, while accounting for endogeneity and persistence in productivity.FindingsThe article finds robust evidence in both static and dynamic frameworks of a significant positive effect of horizontal pay dispersion among experts on firm labour productivity, driven by both incentive effects for current employees and sorting effects for prospective workers. The effect is amplified when the initial level of dispersion is lower. Evidence on vertical pay dispersion is less conclusive: while static results indicate a positive association mainly through incentives for current employees, the dynamic analysis does not confirm a causal link with productivity. Overall, the findings suggest that moderate pay dispersion – particularly among experts – enhances firm productivity without necessarily undermining equity in a low-inequality setting, whereas managerial turnover has the most adverse effects on performance.Research limitations/implicationsResults indicate that moderate pay dispersion can foster firm productivity without necessarily undermining equity in a low-inequality setting.Originality/valueThe article contributes by jointly examining vertical and horizontal pay dispersion, distinguishing between incentive and sorting effects, and contrasting outcomes for managers and experts. Using comprehensive linked employer–employee data allows for a rare large-scale test of compensation strategies and labour mobility in a low-inequality institutional context.

Keywords: Pay dispersion; Employee mobility; Firm performance; Sorting effect; Slovenia (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmpps:ijm-08-2025-0677

DOI: 10.1108/IJM-08-2025-0677

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