Product Quality and Pay Equity between Lower-Level Employees and Top Management: An Investigation of Distributive Justice Theory
Cowherd, Douglas M., Levine, David I., Administrative Science Quarterly
The relationship between interclass pay equity and product quality is examined in a sample of 102 corporate business units. A small pay differential between lower-level employees and upper-echelon managers (after controlling of inputs) is theorized to lead to high product quality by increasing lower-level employees' commitment to top-management goals, effort, and cooperation. Interclass pay equity is determined by comparing the pay and inputs of hourly workers and of lower-level managers and professional to those of the top three levels of managers. Consistent with the prediction of distributive justice history theory, bot measures of pay equity are positively related to business-unit product quality.(*)
Lower-echelon employees are paid much less than upper-echelon managers in North American and Western European businesses. Moreover, the pay differential between the lower and upper strata of organizations in these countries is much larger than in Japan (Koike, 1988; Crystal, 1991), and it has substantially increased since the early 1970s (Harrison and Bluestone, 1988). Many lower-level employees belive that this interclass pay differential is inequitable.
The emotional significance of interclass pay equity is shown in the angry messages that were posted on Apple's internal computer bulleting board when Chief Executive Officer John Sculley's record 1989 compensation was announced at the same time that the profit-sharing formula was revised to be less generous to other employees. One employee commented. "Morale is somewhat like it must have been just before the French Revolution; everyone wants to overthrow the royalty" (Wolf, 1990: 6A). A similar situation occurred in 1982 when General Motors negotiated wage concessions from its unionized employees and then announced that executives would receive large bonuses. The employee outrage that ensued led General Motors to cancel the bonuses (Freeman and Medoff, 1984).(1)
As illustrated by the incidents at Apple and General Motors, research has shown that lower-level employees compare their pay to that of higher-status groups and that this comparison can result in feelings of inequity (for a review, see Dornstein, 1991). However, although there has been extensive reseach on distributive justice, there have been no studies of the effects of interclass pay equity on any aspect of organizational effectiveness. This relationship is gaining importance due to the conflict between widely used participative management practices and the growing economic inequality between lower and upper organizational strata. There is a fundamental ideologial tension between the egalitation premises gthat underlie participative management and the existence of large interclass reward differentials.
Product quality is a particularly important aspect of organizational effectiveness to examine in conjunction with interclass pay equity because quality is highly sensitive to motivational factors that are influenced by distributive justice. Moreover, product quality is critical to the economic performance of businesses and to consumer satisfaction. However, despite the importance of product quality to many organization stakeholders, little is known about how it is affected by organizational factors. In this paper, we integrate equity, relative deprivation, and quality-management theories in a model of the relationship between interclass pay equity and the product quality of business organizations.
Both equity and relative deprivation theories of distributive justice focus on the social comparison of rewards. These two perspectives provide the basis for the theorical model examined in this study.
Equity theory states that people in social exchange relationship believe that rewards should be distributed according to the leve3l of individual contribution (Adams, 1965; Homans, 1974; Walster, Walster, and Berscheid, 1978). …