An organisations internal pay structure can affect the way employees perform to the business strategy. A workers performance not only depends on the pay level they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues wage compression, the act of reducing the size of the pay differences among employees, improves productivity. To gain competitive advantage, organisations need to acknowledge not only hierarchical wage compression (between management and employees) but also the differences between individuals at similar levels. Narrowing pay discrepancies promotes a sense of community and a common fate, leading to greater efficiency by diminishing interpersonal competition and increasing collaboration (Pfeffer, 2005). Pay compression thus advocates equity theory; if internal factors and external competitiveness are aligned, employees perceive their pay to...
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