The Dispersion of Employees’ Wage Increases and Firm Performance

In this contribution we examine the interrelation between the distribution of intra-firm wage increases and firm performance. Previous studies have focused on the dispersion of wage levels in order to examine for the empirical dominance of positive monetary incentive effects compared to adverse effects due to fairness considerations. We argue that the dispersion of wage increases rather than wage levels is a crucial measure for monetary incentives in firms. The larger the dispersion of wage increases the higher the amount of monetary incentives in firms. However, increasing the differences may also hamper fairness considerations. Evidence from a unique Danish linked employer employee data shows that large dispersion of wage growth within firms is generally associated with low firm performance. The results are mainly driven by white collar rather than blue collar workers.