w wage dispersion). Drago and Garvey (1998) report that strong promotion incentives are associated with reduced employee cooperation and individual efforts. Contradicting the equity fairness predictions, Hibbs and Locking (2000) report pression of wage dispersion in panies depressed output and labor productivity. РIn summary, the tournament theory predicts a positive association between firm performance and pay dispersion whereas the equity fairness notions predict a negative association. While the tournament and the equity fairness arguments concerning the impact of pay dispersion on performance provide distinguishable predictions, the empirical evidence— particularly in business settings—is limited and often mixed. To fill the void, we formulate and test the following primary hypothesis.
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