People like me are never promoted! Plurality in hierarchical tournaments for promotion and compensation

Abstract

A central tenet of tournament theory is that interhierarchical pay dispersion promotes effort and performance among employees—regardless of who ends up winning the tournament—because all employees seek to win and thereby receive the large pay raise. However, drawing from social identity theory, we propose that plurality in labor pools has important implications for tournament theory. Specifically, we posit that the performance benefits from interhierarchical pay dispersion are especially large when employees perceive previous promotees as similar to themselves, but minimal when they perceive dissimilarity. Dissimilarity to past tournament winners reduces the perceived probability of success and enhances the perception of injustice in response to interhierarchical pay dispersion, resulting in reduced performance and increased organizational deviance and turnover. Moreover, the influence of perceived demographic similarity on tournament effectiveness is strengthened by social creativity strategies and identity salience but weakened by social mobility strategies. Thus, in some contexts, interhierarchical pay dispersion will not only fail to promote performance, but will backfire and instead promote negative outcomes.

Keywords

Identity salience interhierarchical pay dispersion social identity theory tournament theory

In 2006, the average CEO pay was estimated to be 364 times that of the average worker in the United States (Walsh, 2008). The next highest ratios belong to Canada (208) and Spain (147) (American Federation of Labor and Congress of Industrial Organizations, 2014). Accordingly, common compensation policies across the globe typically entail large gaps between hierarchical levels, with the gaps increasing in size as one goes up the organizational hierarchy (Bognanno, 2001; Conyon, Peck, & Sadler, 2001; Erikkson, 1999; Lambert, Larcker, & Weigelt, 1993). Tournament theory describes this pay structure, as well as the effects of this sort of interhierarchical pay dispersion (Lazear & Rosen, 1981). In a tournament system, those who perform better than their peers are promoted to the next level of hierarchy and receive large pay raises. Originating in economics, the foundational idea behind tournament theory is that the prospect of future promotion—and perhaps more importantly, a large pay raise that accompanies the promotion—can serve as a strong motivator to workers to perform well in their current positions (Devaro, 2006), even if most of them will not end up winning their tournaments for promotion.

An often overlooked extension to tournament theory is that not everyone has the same probability of winning the tournament (Feess, Muehlheusser, & Walzl, 2008; Gill & Stone, 2010; Grund & Westergaard-Nielsen, 2008; O’Keeffe, Viscusi, & Zeckhauser, 1984). Some differences in the probability of winning are due to effort or talent (Brown, 2011; Gill & Stone, 2010). However, in many organizational promotion tournaments outperforming all competitors may not be enough to be the winner (Feess et al., 2008; O’Keeffe et al., 1984). Erosion of the merit basis of promotions undermines the benefits of the tournament pay structure (Devaro, 2006).

Social identity theory indicates that people have a natural inclination to categorize themselves and other people around them (Tajfel, 1978). Social identity is the “part of an individual’s self-concept which derives from his knowledge of membership in a social group (or groups) together with the value and emotional significance attached to that membership” (Tajfel, 1978, p. 63). Specifically, people automatically ascribe to psychological groups, defined as a “collection of people who share the same social identification or define themselves in terms of the same social category membership” (Turner, 1984, p. 530). Interaction with other members of a psychological group is unnecessary for an individual to consider himself or herself to be a part of one, and members experience the success and failures of the members of their groups (Ashforth & Mael, 1989). Consistent with social comparison theory (Festinger, 1954), social identity theory indicates that people viewed as similar to one’s self are especially relevant for social comparisons (Turner, 1985; Turner, Hogg, Oakes, Reicher, & Wetherell, 1987).

We posit that this has important implications for tournament theory. Specifically, we propose that members of organizations observe tournament winners over time, noting the prevalence of members of their own groups as promotion tournament winners. When an individual observes that people who win tournaments are dissimilar to themselves, they will infer that their own odds of promotion are small, whereas those who perceive similarity between themselves and tournament winners will infer that their own odds are encouraging. Thus, we posit that interhierarchical pay dispersion will not only reduce beneficial behaviors from those participants who perceive themselves as dissimilar to tournament winners, but it will also lead to negative outcomes instead. We expect that the effects of dispersion will be due to both the employees’ expectancy of winning as well as their perceptions of justice in the tournament.

Also suggested by social identity theory, employees differ in the extent to which their demographic identities are salient and therefore they may also respond to perceived dissimilarity in different ways. Demographic identities that are salient will enhance the likelihood of employees perceiving dissimilarity to previous promotees and therefore strengthen the effect of dissimilarity on tournament effectiveness. Employees may also engage in different identity enhancement strategies in response to dissimilarity including social mobility and social creativity strategies (Chattopadhyay, Tluchowska, & George, 2004b; Tajfel & Turner, 1986). We contend that a social mobility strategy therefore weakens the effect of demographic similarity on tournament effectiveness, and a social creativity strategy results in strengthening the effect of demographic similarity. Accordingly, we suggest that tournament effectiveness is further influenced by the salience of demographic identities and the identity enhancement strategy employees use in response to dissimilarity.

Thus, the purpose of this paper is to draw from social identity theory to extend tournament theory. In so doing, we move from a unified view of labor pools to a pluralistic view, further countering the assumption that interhierarchical pay dispersion always leads to beneficial outcomes by indicating that in some contexts it can promote negative outcomes. Drawing the outcomes of performance, organizational deviance, and turnover from tournament theory, we develop a model of tournament theory that takes into account how the attributes of past tournament winners influence responses to tournament-based compensation systems. Our model focuses specifically on surface-level demographic characteristics as moderators. The purpose of this extension to tournament theory is to expand our understanding of when interhierarchical pay dispersion will beneficially influence individual outcomes and when it will backfire.

Tournament theory

Lazear and Rosen (1981) noted that organizations often structure their compensation systems in a manner analogous to a winner-takes-all tournament. Compensation is strongly tied to promotions such that a primary way to increase compensation is to get a promotion. Employees are essentially participants in a tournament for a scarce number of promotions. The tournament prize (promotion) is fixed in advance of the tournament and rather than the prize being continuous—which would match the continuous scaling of effort from participants—promotion tournament prizes are discreet; those who win are promoted and those who lose are not promoted. Employees are evaluated based on their relative performance rather than their absolute performance. Thus, even if two employees both perform on a very high level using an absolute scale and their performances are barely distinguishable from each other, the employee with the higher performance gets the promotion and the other does not.

Tournament theory (Lazear & Rosen, 1981) proposes that such tournaments are efficient in encouraging high levels of effort and performance out of all contestants because everyone wants to win the tournament. Even though in most scenarios only a minority will win (often only a single participant), all participants seek the prize. Moreover, the bigger the increase in pay to be obtained from promotion, the greater the motivation for winning the tournament, and the greater the effort and performance from all participants. Thus, even though top management team members may know that only one of them can be promoted to CEO, a very large prize will induce all of them to work hard to be that single winner. The same logic applies at lower levels in the organizational hierarchy. This pay variation across jobs at different levels in organizational hierarchy is call vertical or interhierarchical pay dispersion (Gupta, Conroy, & Delery, 2012). Indeed, the value of the promotion is not just the pay raise at that level but also includes the value of the possibility to compete for larger prizes at higher levels (Erikkson, 1999).

Tournament theory is derived from the labor economics literature, with Lazear and Rosen’s (1981) paper focused on introducing the tournament structure and demonstrating its effectiveness. Subsequent papers further support tournament structure effectiveness (e.g., Audas, Barmby, & Treble, 2004; Bognanno, 2001; Ehrenberg & Bognanno, 1990) and explore conditions under which tournament structures are effective such as when monitoring precision is low and prizes are indivisible (O’Keeffe et al., 1984), as well as identify other outcomes of tournament structures such as risk-taking (Kini & Williams, 2012) and sabotage (Harbring & Irlenbusch, 2008; Munster, 2007). “Unfair” conditions have also been investigated with Brown (2011) finding decreased effort among participants when a superstar is in the competition, and O’Keeffe et al. (1984) and Feess et al. (2008) mathematically demonstrating how compensation could be structured to overcome situations where some participants have advantages over others. These studies provide insight into situations under which tournament structures may not be effective. However, within the labor economics literature, the “unfair” conditions are mathematically applied with little exploration of the psychological mechanisms that accompany such conditions. In contrast, within the management literature, tournament theory has been utilized to examine compensation structures and their impact on employee performance and behavior (Connelly, Tihanyi, Crook, & Gangloff, 2014).

Tournament theory studies within the management literature refer to the antecedents and consequences of interhierarchical pay dispersion as well as the impact of such dispersion on the effort of participants across multiple contexts including innovation, franchising, and laboratory experiments (Connelly et al., 2014). Studies have found that a larger pool of participants in a tournament is related to greater levels of interhierarchical pay dispersion (Conyon et al., 2001; Henderson & Fredrickson, 2001), and the potential consequences of interhierarchical pay dispersion include increased turnover (Bloom & Michel, 2002; Messersmith, Guthrie, Ji, & Lee, 2011; Wade, O’Reilly, & Pollock, 2006) and higher levels of counterproductive work behavior (Henderson & Fredrickson, 2001; Siegel & Hambrick, 2005). There has also been exploration into boundary conditions. Researchers have found that the effectiveness of interhierarchical pay dispersion is reduced when incentives are politically based (Kepes, Delery, & Gupta, 2009), contexts are risky and uncertain (Bloom & Michel, 2002), and interdependencies exist between participants (Bloom, 1999). In addition, the effectiveness of interhierarchical pay dispersion strengthens when there is a perceived fairness of evaluation criteria (Gomez-Mejia, Trevino, & Mixon, 2009). Taken together, studies within both the labor economics and management literature suggest there are some conditions under which tournament structures are not as effective and there is also empirical evidence suggesting moderating factors may exist.

Although several researchers have found empirical support for the positive effect of interhierarchical pay dispersion on performance (Audas et al., 2004; Becker & Huselid, 1992; Cowherd & Levine, 1992; Devaro, 2006; Ding, Akhtar, & Ge, 2009; Erikkson, 1999; Henderson & Fredrickson, 2001), the effect sizes have been relatively small. For example, Becker and Huselid (1992), Cowherd and Levine (1992), and Ding et al. (2009) found that interhierarchical pay dispersion accounted for between 2% and 6% of the variance in performance. Moreover, not all tournament theory research has supported this assertion. Conyon et al. (2001) found that this form of pay dispersion did not have a robust positive effect on firm performance. Mahy, Rycx, and Volral (2011) found that interhierarchical pay dispersion had beneficial effects on performance up to a point, but then negative effects at higher levels. Grund and Westergaard-Nielsen (2008) found a U-shaped relationship between pay dispersion and performance, with most firms on the negative portion of the curve. These inconsistent empirical results suggest that there are boundary conditions surrounding the effectiveness of tournament structures. Although labor economics scholars have explored mathematically derived “unfairness” and management scholars have identified some contextual factors that influence tournament effectiveness, we explore a factor that has not been studied within tournament theory: the attributes of those being promoted. We utilize social identity theory to explain how employees’ perceived demographic similarity to previous promotees influences whether interhierarchical pay dispersion is effective.

Social identity theory and perceived similarity

Humans have a natural tendency to make social comparisons, especially toward those similar to themselves (Festinger, 1954). These tend to not be effortful, consciously controlled processes, but instead are spontaneous and unintentional (Baldwin & Holmes, 1987; Latane & Darley, 1970). Social identity theory indicates that such comparisons are influential in determining whom one identifies with (Ashforth & Mael, 1989; Tajfel, 1978; Turner, 1982, 1984). Social identification arises from the categorization of individuals—including the self—into groups, and is defined as “the perception of oneness with or belongingness to some human aggregate” (Ashforth & Mael, 1989, p. 21). This classification aids in the process of self-enhancement and uncertainty reduction (Hogg & Terry, 2000). People are motivated to identify with positive social identities to enhance their self-esteem (Abrams & Hogg, 1988). Social identification also reduces uncertainty by cognitively segmenting and ordering one’s social environment such that one can define others and one’s self (Ashforth & Mael, 1989; Sluss & Ashforth, 2007). Thus, social identification processes enhance self-esteem and help people make sense of themselves and the people around them, as well as what behaviors are appropriate for the self and others (Ashforth, Harrison, & Corley, 2008).

Turner (1984) refers to a psychological group as a collection of people with the same social identification or social category membership. Mutual interaction or liking is not necessary for people to consider themselves members of a psychological group (Turner, 1984), nor is strong leadership or membership interdependence necessary (Ashforth & Mael, 1989). As membership in a category becomes salient, members will tend to exaggerate differences between members of the group and people outside of the group—especially on prototypical dimensions—and minimize the differences between members of the group (Turner, 1982). Moreover, people will tend to more favorably evaluate members of their own groups than members of other groups (Turner, 1982). Even negatively valued distinctions between one’s own group and other groups are associated with identification, and may be recast as positive (Ashforth & Mael, 1989). Indeed, Ashforth and Mael (1989, p. 24) provide the example that members may note, “We’re not popular because we avoid playing politics.”

Thus, individuals perceive the self as a member of a group with a particular constellation of prototypical characteristics. Although all members of the same category are seen as sharing a certain degree of prototypicality, they will still differ in the extent to which they are perceived to be representative and prototypical of the group (Haslam & Ellemers, 2005). For example, although all football players on a team may be seen as members of the team, the quarterback may be seen as more prototypical of the group than the punter. In other words, rather than being dichotomous checklists of features that determine whether an individual is in a group or not, groups are described by fuzzy sets that capture the features of the group and are often represented by either an abstraction of features or by the members who best embody the prototype of the group (Hogg & Terry, 2000).

Moreover, individuals will often identify with more than one group due to the existence of a large variety of characteristics that are not typically captured by a single group (Ashforth et al., 2008). Ashforth and colleagues note that sometimes these identities are nested within each other, whereas others may cut across categories. Leavitt, Reynolds, Barnes, Schilpzand, and Hannah (2012) provide examples of employees with multiple identities; soldiers who are also medics, and managers who are also engineers. This is consistent with the view of cultural mosaics as a way to see multiple cultural identities within a single person (Chao & Moon, 2005), research examining the alignment of multiple shared characteristics in subgroups (Lau & Murnighan, 1998, 2005), and recent theory on multiple categorizations of individuals (Kulik, Roberson, & Perry, 2007).

Thus, people will assess the degree to which others share their own characteristics and will tend to rate others as similar to themselves (and thus in their psychological groups) to the degree to which this similarity occurs. A focal employee will identify even more strongly as a fellow group member of someone who shares both gender and ethnic group than an individual who shares only one such characteristic. This is consistent with faultline theory, which indicates that the greater the number of overlapping characteristics the more likely people are to identify with a shared subgroup (Lau & Murnighan, 1998, 2005). In sum, social identity theory proposes that the more similar a focal employee perceives him or herself to be with another employee, the more likely the focal employee is to lump him or herself together with the comparison employee as “us.”

Recent research indicates that several characteristics relevant to group identification are especially salient in organizations. These vary along a continuum from surface-level characteristics that are immediately apparent to deep-level characteristics that are less visibly detectable (Harrison, Price, & Bell, 1998; Harrison, Price, Gavin, & Florey, 2002). They include demographic differences such as age, gender, ethnic group, marital status, and functional background (Harrison et al., 1998; Harrison et al., 2002; Phillips & Loyd, 2006), which are readily apparent with minimal social interaction. Deep-level diversity includes characteristics such as personality, values, attitudes, and beliefs. Contrary to surface-level characteristics, deep-level characteristics take time to uncover through long-term, in-depth interpersonal interactions. As tournament winners may come from different departments in the organization, interaction between any given employee and the winners may be minimal. For this reason we only focus on perceived dissimilarity in surface-level demographic characteristics.

Although social identity theory is a group-level theory, we focus on the psychological mechanisms that individuals engage in as described by the social comparison and self-categorization aspects of the theory. Therefore, our model is at the individual level of analysis. We utilize social identity theory to describe how employees compare their surface-level attributes with those of previous promotees and explain why the resulting perceived dissimilarity affects their behavior. In the next section, we describe how social identities based on these demographic characteristics are relevant to tournament theory.

Theoretical model

As noted before, social identity theory indicates that people more favorably evaluate members of their own group than people outside of their group. This helps to explain why many organizations are less diverse at higher levels of their organizational hierarchy than they are in lower levels. To illustrate, if the founding group of an organization was homogenous, and over time the organization grew, members of this founding group might have a tendency to favorably evaluate and thus promote people similar to themselves (Schneider, 1987). In addition, differences in access to education and career resources might create an advantage for some groups that were initially disproportionately represented in the upper levels of the organizational hierarchy, and these differences would then persist in part because of in-group favoritism. Again, as noted by social identity theory, such favoritism may not be intentional. However, even small amounts of favoritism may lead to noticeable differences in promotion rates, especially in the context of a winner-takes-all context. Indeed, this reasoning is consistent with empirical studies which show between-group differences in selection and representation at higher levels of the organizational hierarchies (Agerstrom & Rooth, 2011; Bamberger, Admati-Dvir, & Harel, 1995; James, 2000; Ohlott, Ruderman, & McCauley, 1994).

We propose that this tendency to categorize oneself with similar others can have a profound impact on the effectiveness of tournament structures. If employees perceive demographic dissimilarity to past tournament winners, they will perceive a lower probability of winning and experience more injustice, resulting in lower levels of tournament effectiveness. Consistent with past work on tournaments, we describe effectiveness in terms of its influence on performance, organizational deviance, and employee turnover outcomes. We argue that demographic dissimilarity influences tournament effectiveness due to both the extent that demographic identities are salient, and whether or not a social mobility or a social creativity strategy is used. We therefore explore the additional moderating effects of identity salience and identity enhancement strategies on how demographic dissimilarity affects tournament effectiveness. Overall, we utilize social identity theory to depict conditions under which interhierarchical pay dispersion may cause undesirable employee outcomes.

Interhierarchical pay dispersion and performance

Social identity theory indicates that when people are socially identified with a group, they personally experience the success and failures of that group (Ashforth & Mael, 1989). Drawing from this, we propose that people will notice the prevalence of promotion tournament winners who are similar to themselves, and this observation will have an effect on whether interhierarchical pay dispersion motivates performance. As currently formulated, tournament theory proposes that a primary way to incentivize employees to engage in high levels of effort (and thus performance) is to increase the interhierarchical pay dispersion. Holding constant the probability of winning the tournament, the size of the reward drives participant interest in winning the reward and thus their efforts to do so. However, using social identity theory, we propose that this is only partially true. For individuals who see that people like themselves often win tournaments, the size of the interhierarchical pay dispersion will influence their performance. However, for individuals who see that people like themselves rarely win tournaments, the size of the interhierarchical pay dispersion will be much less relevant in determining their performance. Indeed, in the extreme case that an employee perceives that none of the previous tournament winners are like him/herself, the size of the reward (i.e., the level of interhierarchical pay dispersion) will have no effect at all on his/her performance. In short, perceived similarity between the self and previous tournament winners will moderate the effect of interhierarchical pay dispersion on individual performance.

Previous research provides indirect support for this contention. Lockwood and Kunda (1997) found that high-performing role models provoke inspiration only when viewed as similar to the self. In the context of promotion tournaments, this suggests that employees will only find previous tournament winners’ rewards (such as when they receive a big pay raise along with a promotion) to be inspiring when they perceive previous tournament winners as similar to themselves. Similarly, Lockwood (2006) found that members of groups that are historically underrepresented in the higher levels of organizational hierarchies (in this case, women) had a more positive view of their own competence when they had career role models who were similar to themselves (i.e., when their role models were women).

Expectancy theory indicates that above and beyond how much people value an outcome, people decide how much effort to invest in part based on their expectancy of their effort leading to the desired outcome (Vroom, 1964). A meta-analysis indicates considerable empirical support for this prediction (van Eerde & Thierry, 1996). Relevant to both the role modeling and expectancy research is the “Obama effect” highlighted by Marx, Ko, and Friedman (2009). They found that performance of Black participants increased in response to exposure to Barrack Obama as a positive role model. One of the reasons perceived demographic similarity to previous promotees influences tournament effectiveness is because of perceptions of the probability of promotion. Using a boundedly rational view of tournament competitors, tournament theory depicts competitors as monitoring their odds of success in tournaments. When their odds of success in the tournament are low—either due to a high number of competitors that lower the odds of success for any given participant (Kalra & Shi, 2001; Leonard, 1990) or known differences in ability that lower the odds of success for those low in ability (Knoeber & Thurman, 1994)—employees will not find tournament structures as compelling. For example, Brown (2011) found that the presence of a superstar in a tournament is associated with reductions in performance from other tournament competitors. She examined professional golf tournaments in years 1999 through 2006, in which Tiger Woods was a dominant player. She found that in tournaments in which Tiger Woods competed, other golfers performed worse by about 0.8 strokes than when he did not compete. There were analogous effects in the tournaments in which Woods competed; when Woods performed especially well, other golfers performed especially poorly, and when Woods performed especially poorly, other golfers performed especially well. This is consistent with the view that when tournament participants view their odds of winning the tournament as relatively high, they are more willing to invest effort into winning the tournament, whereas when tournament participants view their odds of winning the tournament as relatively low, they are less willing to invest effort into winning the tournament.

When an individual sees that previous promotion winners tend to be dissimilar to the self, the employee will infer that his or her own odds of winning promotions are low. Previous research lends support to the contention that people notice similarity in demographic attributes when evaluating opportunities for promotion. Avery, McKay, and Wilson (2008) found that employees from ethnic groups that are historically underrepresented within higher levels of organizational hierarchies (Black and Hispanic) were more likely to perceive workplace discrimination than employees who are historically overrepresented (White). However, this was in part dependent upon similarity between respondents and their supervisors; perceived discrimination was especially pronounced among those whose supervisors were from a different ethnic group than themselves. Similarly, Foley, Kidder, and Powell (2002) found that the proportion of Hispanic law associates in a given firm was negatively associated with the perceptions of Hispanic participants of a glass ceiling in their firm. Thus, participants observed that people like themselves have been disproportionately unsuccessful in bids to win past promotion tournaments and inferred that the likelihood of people like themselves of winning future promotion tournaments was low. Therefore, we propose that employees who perceive themselves as dissimilar to past tournament winners will perceive lower odds of success of winning the tournament and will not work as hard to win the tournament.

Another mechanism underlying the lower effectiveness of tournaments for dissimilar employees is perceived justice. Tournament theory studies have demonstrated that tournaments have important implications for perceptions of justice (Cowherd & Levine, 1992; Gomez-Mejia et al., 2009; Grund & Westergaard-Nielsen, 2008; Wade et al., 2006). Greater pay gaps lead to lower perceptions of justice (Grund & Westergaard-Nielsen, 2008). Gill and Stone (2010) contend that tournament competitors compare the effort of various competitors, calculating counterfactual expected outcomes had the tournament been conducted in a fair manner such that effort and performance dictate the tournament winner. When they perceive that the tournament is conducted in an unfair manner—in other words, previous winners were selected over better performers—participants will perceive injustice in the system. Therefore, past research indicates that tournament structures can influence justice perceptions and consistent with these findings we suggest that perceptions of dissimilarity will result in even lower perceptions of justice.

The procedural justice literature provides support for our contention that perceived dissimilarity can exacerbate perceptions of injustice within tournament structures. The four-component model of procedural justice suggests that individuals evaluate the fairness of formal rules as well as the informal implementation of the rules, and within each of these components, the quality of decision-making and interpersonal treatment (Tyler & Blader, 2000, 2003). Within a tournament structure, the formal and informal decision-making procedures are the components that inform procedural justice evaluations. Procedural justice is also linked to social identity in that perceptions of justice influence the extent to which individuals develop and maintain a positive identity by being a member of a particular group (Tyler & Blader, 2000).

Within a tournament structure, employees experience the two decision-making components of procedural justice. The formal decision-making component refers to whether the formal rules and procedures for making decisions are perceived as fair and derives from perceptions of neutrality or lack of bias and consistent application of rules across persons (Tyler & Blader, 2000). If employees perceive dissimilarity to past tournament winners, they may conclude that promotions were based on rules that favored specific demographic categories and were not consistently applied. The informal decision-making component represents whether authorities implement rules in an unbiased and consistent manner. Again, employees who do not perceive similarity to previous promotees may assume that leaders did not apply the rules in a fair manner, resulting in low levels of perceived justice. One tournament theory paper proposed that tournaments are viewed as higher in justice when they are conducted using nonexclusionary criteria (Gomez-Mejia et al., 2009). They found that tournaments that allow a broad variety of people to compete fairly, rather than excluding some people from winning the competition based on non-performance-based criteria, are viewed as more procedurally just. Therefore, employees who perceive dissimilarity to previous promotees will perceive low levels of justice in response to tournament structures. One of the potential outcomes when individuals perceive low levels of justice is lower levels of behavior mandated by the group (Tyler & Blader, 2003). Together, these arguments suggest that employees who perceive dissimilarity to previous promotees are more likely to perceive injustice as a result of tournament structures, resulting in lower levels of performance. Accordingly, we propose the following:

Proposition 1: Perceived demographic similarity to previous promotion tournament winners will moderate the positive effect of interhierarchical pay dispersion on individual performance such that high perceived similarity will enhance the beneficial effect of dispersion on individual performance and low perceived similarity will neutralize it.

Proposition 2: (a) Perceived probability of promotion and (b) perceived justice will mediate the interactive effect of demographic similarity and interhierarchical pay dispersion on individual performance.

Interhierarchical pay dispersion and organizational deviance

Tournament theory notes that tournament pay structures can potentially induce negative behavior such as cheating, sabotage, withholding of information, and retaliation (Grund & Westergaard-Nielsen, 2008; Harbring & Irlenbusch, 2008; Lazear, 1985, 1995; Munster, 2007; Stowe & Gilpatric, 2010). Although tournament theory focuses narrowly on cheating and sabotage behaviors as negative behaviors engaged in by tournament participants, research indicates that in organizations, employees have a broad set of negative behaviors in which they can engage. Robinson and Bennett (1995) define organizational deviance as voluntary behavior that violates organizational norms and thereby threatens the well-being of the organization or its members. This broad variety of behavior may be targeted at specific employees or at the organization in general, and can vary in the degree to which it is harmful (Bennett & Robinson, 2000; Robinson & Bennett, 1995). Existing research suggests that this counterproductive behavior is especially likely to be prevalent among those least likely to win tournaments (Munster, 2007). Therefore, employees who perceive themselves to be dissimilar to previous promotees and less likely to win the tournament will be more likely to engage in organizational deviance.

A large body of research indicates that the injustice perceptions promoted by tournaments will lead to the organizational deviance. This is especially clear in Greenberg’s (1993) experiment in which he manipulated justice and found that compared to a situation low in injustice, a situation high in injustice promoted monetary theft in the research participants. In addition, meta-analytic evidence across a broad variety of contexts indicates a clear relationship between perceptions of justice and organizational deviance (Berry, Ones, & Sackett, 2007; Colquitt, Conlon, Wesson, Porter, & Ng, 2001). Thus, it is reasonable to expect that high levels of interhierarchical pay dispersion in combination with low demographic similarity between the employee and tournament winners will lead to increased organizational deviance due to his or her perceptions of injustice. In contrast, where there are minimal differences between pay across hierarchical levels in an organization, there will be a minimal effect on perceptions of injustice and thus a minimal effect on organizational deviance. Accordingly, Propositions 3 and 4 state this expectation.

Proposition 3: Perceived demographic similarity to previous promotion tournament winners will moderate the positive effect of interhierarchical pay dispersion on organizational deviance such that low perceived similarity will enhance the positive effect of dispersion on organizational deviance and high perceived similarity will attenuate it.

Proposition 4: Perceived justice will mediate the interactive effect of perceived demographic similarity and interhierarchical pay dispersion on organizational deviance.

Interhierarchical pay dispersion and turnover

A remaining outcome included in tournament theory is exit from the tournament (Harbring & Irlenbusch, 2003; Kamas & Preston, 2012), which in the context of organizations typically takes the form of turnover (e.g., Messersmith et al., 2011; Wade et al., 2006). Messersmith et al. (2011) and Bloom and Michel (2002) find that tournament pay structures, and interhierarchical pay dispersion specifically, promote turnover in organizations. Similar to the decision of how much effort to allocate to a tournament, Harbring and Irlenbusch (2003) found that people are especially likely to avoid participating in a tournament when they do not think they will win. Therefore, perceived demographic similarity to previous promotees will result in higher levels of turnover within organizations that use tournament structures, and this turnover behavior is likely a result of the employees’ expected probability of winning the tournament.

Moreover, Wade et al. (2006) suggest that tournament participants take justice into account in deciding whether or not to leave an organization that has a tournament pay structure. They find that when lower level managers are underpaid relative to their CEO, they are especially likely to leave the organization. This effect is independent of their pay in comparison to their peers in the external job market. A large literature links justice perceptions to turnover (cf. Griffeth, Hom, & Gaertner, 2000). Thus, some of the tournament-induced turnover is likely to be influenced by the injustice perceptions that result from the perceptions of being dissimilar from the typical tournament winner. In other words, one way in which tournament structures can backfire is that people who see that others like them are unlikely to win large tournament prizes (i.e., large raises that accompany promotions) will perceive injustice and be especially likely to quit the organization. Therefore, we propose that perceived similarity between the self and previous tournament winners will moderate the effect of interhierarchical pay dispersion on turnover, and that perceived probability of promotion and perceived justice will mediate this relationship.

Proposition 5: Perceived demographic similarity to previous promotion tournament winners will moderate the positive effect of interhierarchical pay dispersion on turnover such that low perceived similarity will enhance the positive effect of dispersion on turnover and high perceived similarity will attenuate it.

Proposition 6: (a) Perceived probability of promotion and (b) perceived justice will mediate the interactive effect of perceived demographic similarity and interhierarchical pay dispersion on turnover.

Interactive effect of identity salience

Demographic similarity to previous promotees affects tournament effectiveness only to the extent employees’ demographic characteristics are salient. Identity salience results from both applicability and accessibility (Higgins, 1996). Applicability refers to knowledge within an individual’s cognition becoming salient when it matches the characteristics of the situation. Within social identity theory, applicability describes social categories becoming activated for individuals as a result of comparative fit or normative fit (Oakes, 1987). A social category becomes salient as a result of comparative fit if applying the social category maximizes both similarities among those within the category and differences from those outside of it. An example within a tournament structure would be a female employee comparing herself to previous promotees who are all male. The female identity may become salient as a result of comparative fit because the employee categorizing herself as female maximizes both similarities with others in the group (i.e., other females) and differences from the males who represent previous promotees. The proportion of employees within the organization as a whole within different demographic groups can also affect identity salience (Chattopadhyay, George, & Lawrence, 2004; Chattopadhyay, George, & Ng, 2011; van Knippenberg & Schippers, 2007). If a large proportion of the employees within an organization are male, employees’ gender identity becomes salient as a result of comparative fit. Identities can also become salient as a result of normative fit which is when expectations, beliefs, and theories about a social category match the characteristics of the situation (Haslam, Oakes, Reynolds, & Turner, 1999). Within a tournament, an employee may have expectations about which social categories are representative of promotees. If a female employee believes that promotees are usually male, then the gender social category and categorizing herself as female will become salient as a result of normative fit. The extent to which identities are applicable to the situation influences the salience of specific demographic categories within the minds of employees and can affect whether those demographics are considered when perceiving similarity to previous promotees.

The other aspect of identity salience is accessibility, which refers to the potential for knowledge to become activated (Higgins, 1996). Knowledge or social categories that are accessible are more easily retrieved within individuals’ minds and are therefore more likely to become salient within a situation. Information or identities that are more frequently used or especially important to individuals are more accessible (Higgins, 2000; Hogg & Terry, 2000). For example if employees often find themselves in situations at work in which their gender identity is salient or used, their gender identity is more cognitively accessible in general. So when a colleague gets promoted, the gender of the promotee may be salient because gender is always top of mind for the employee as a result of frequency. The gender identity is then more likely to play a role in the employee’s perception of similarity. Importance or psychological centrality of a social category also influences accessibility (Rosenberg, 1979; Stryker & Serpe, 1982). If employees’ gender identity is highly central to how they define themselves, they are more likely to consider their gender when perceiving their similarity to previous promotees. Frequency and identity centrality influence how accessible and therefore salient social categories are for employees when they are making similarity comparisons to past tournament winners. Accordingly, we propose the following:

Proposition 7: There will be a three-way interaction between perceived demographic similarity, identity salience, and interhierarchical pay dispersion such that identity salience will strengthen the moderating effect of perceived similarity on the effect of interhierarchical pay dispersion on (a) individual performance, (b) organizational deviance, and (c) turnover.

Interactive effect of identity enhancement strategies

Driven by the fundamental desire to enhance one’s own social identity, individuals actively engage in strategies to enhance their own self-image and self-esteem and improve their social position (Tajfel & Turner, 1986). When individuals perceive dissimilarity, they may engage in an identity enhancement strategy so that their social identity is perceived more positively (Chattopadhyay et al., 2004b). The three identity enhancement strategies are social mobility, social competition, and social creativity (Tajfel & Turner, 1986). Social creativity and social competition strategies were conceived of at the group level by Tajfel and Turner (1986) and further expanded upon within the context of permeable work group boundaries and legitimate and stable status hierarchies by Chattopadhyay et al. (2004b). However, all three of these identity enhancement strategies can explain psychological processes that individuals engage in to fulfill individual needs for self-enhancement. We therefore theorize how identity enhancement strategies at the individual level interact with perceived demographic similarity to influence tournament structure effectiveness.

Social mobility refers to an individual’s effort to psychologically distance him or herself from a low-status group and obtain membership in a high-status group (Tajfel & Turner, 1986). They may do so by adopting attributes or values of the higher status group. Within a tournament context, employees who perceive demographic dissimilarity to previous promotees may seek attributes separate from demographic characteristics that allow them to align themselves with these individuals. The likelihood of employees engaging in social mobility in order to be more similar to past tournament winners is greatly influenced by the employees’ perception of the permeability of the group boundaries (Chattopadhyay et al., 2004b; George, Chattopadhyay, & Zhang, 2011). The concept of permeability refers to an individual’s belief system regarding whether or not it is possible to move between groups as opposed to the objective reality (Hogg & Abrams, 1988). In a tournament context, employees will engage in a social mobility strategy if they perceive ease of movement across the boundary that differentiates them from past tournament winners (i.e., believe they can be perceived as similar to previous promotees). An example of this is a female employee who perceives demographic dissimilarity to tournament winners who are all male but categorizes herself with the winners based on a shared alma mater. As employees engage in a social mobility strategy and psychologically categorize themselves on specific attributes with previous promotees, the interactive effect of perceived demographic similarity on tournament effectiveness will be attenuated.

Proposition 8: There will be a three-way interaction between perceived demographic similarity, social mobility strategy, and interhierarchical pay dispersion such that a social mobility strategy will weaken the moderating effect of perceived similarity on the effect of interhierarchical pay dispersion on (a) individual performance, (b) organizational deviance, and (c) turnover.

Social creativity is defined as a collective strategy that involves comparing the lower status group to the higher status group on a new dimension which may be irrelevant to the organization but results in perception of enhanced status by the lower status group (Tajfel & Turner, 1986). Applying this identity enhancement strategy to the individual level in the tournament context suggests that employees will identify an attribute about themselves to fulfill their individual need for self-enhancement while maintaining their dissimilarity to previous promotees. For example, female employees who perceive all previous promotees as male may reinforce their self-esteem by emphasizing in their minds that they are superior in their relationship-building skills. A social creativity strategy is likely to be utilized to enhance the individual’s social identity as a result of perceptions of impermeability, legitimacy, and stability in the organizational status hierarchy (Chattopadhyay et al., 2004b). In a tournament context, legitimacy may refer to perceptions that the criteria used for promotion are fair and stability may represent employees’ beliefs that they can change these criteria through their individual efforts. If promotion criteria are perceived as legitimate and stable, and boundaries appear impermeable, employees will use a social creativity strategy. Using a social creativity strategy reinforces the psychological distance (that derives from demographic dissimilarity) employees feel from previous promotees, resulting in an even stronger moderating effect of demographic similarity.

Proposition 9: There will be a three-way interaction between perceived demographic similarity, social creativity strategy, and interhierarchical pay dispersion such that a social creativity strategy will strengthen the moderating effect of perceived similarity on the effect of interhierarchical pay dispersion on (a) individual performance, (b) organizational deviance, and (c) turnover.

The identity enhancement strategies within social identity theory provide insight into how employees may react when perceiving demographic dissimilarity to previous promotees within a tournament structure. The type of strategy used impacts the effect that perceived demographic similarity has on tournament effectiveness. Using a social mobility approach may actually neutralize the moderating effect of perceived demographic dissimilarity as employees psychologically perceive themselves as more similar to previous promotees by categorizing themselves together on a separate attribute. On the other hand, a social creativity strategy may further strengthen the moderating effect of demographic dissimilarity as employees strengthen their perceived dissimilarity to past winners by emphasizing their strength in an attribute that past winners do not possess.

Discussion

In this paper, we sought to introduce a boundary condition to tournament theory that has not been explored: perceived demographic similarity to those who have been promoted. Whereas tournament theory rests on the assumption that increasing the pay spread between hierarchical levels increases the performance of everyone, we draw from social identity theory to propose that labor pools are not unified in a manner that is consistent with this assumption. Instead, there is plurality in labor pools, and employees adjust their behavior based on their observations regarding how well represented people like them are in promoted positions. Interhierarchical pay dispersion will not motivate employees who observe that people who they perceive as similar to themselves are not promoted. Moreover, such employees will be especially likely to either retaliate in the form of organizational deviance or leave the organization altogether. Thus, following the prescriptions of tournament theory can backfire.

Implications for theory

The primary theoretical implication for tournament theory is that perceived similarity to previous promotees is an important boundary condition. This explains why previous research testing tournament theory has found nonsignificant (Conyon et al., 2001), relatively weak (Becker & Huselid, 1992; Cowherd & Levine, 1992; Ding et al., 2009), or conflicting (Grund & Westergaard-Nielsen, 2008; Mahy et al., 2011) results for the effects of interhierarchical pay dispersion on performance. Our propositions indicate that tournament theory predictions about interhierarchical pay dispersion will hold for those who see themselves as similar to previous tournament winners. Indeed, previous research has probably underestimated these effects for such people. However, for those who do not see themselves as similar to previous winners, tournament theory predictions about how interhierarchical pay dispersion will aid performance are likely invalid. Researchers will likely find that for these employees, dispersion will lead to deviance and turnover.

A second implication for theory is that although tournament theory has primarily focused on beneficial outcomes of interhierarchical pay dispersion, there are negative outcomes as well that can be differentially predicted for different groups. Becker and Huselid (1992) took a step in this direction by noting that tournaments can promote risk, but whether or not risk is a bad outcome depends on the probabilities and sizes of potential rewards and losses which will vary from situation to situation. Our propositions indicate that interhierarchical pay dispersion can promote negative outcomes depending on the characteristics of employees at various levels of the organizational hierarchy.

A third implication for theory ties back to the diversity literature. Whereas the diversity literature primarily focuses on the main effects of diversity on organizational outcomes (van Knippenberg, De Dreu, & Homan, 2004), including performance, deviance, and turnover (Liao, Joshi, & Chuang, 2004; Sacco & Schmitt, 2005; Thatcher & Patel, 2011), the propositions noted in this paper indicate that diversity can have important implications as a moderator in the tournament context. A peripheral implication is that employees may perceive the same tournament structure as fair or unfair, depending on their own characteristics and the diversity of the labor pool and management ranks in the organization.

Thus, there may be contexts in which employees dissimilar to tournament winners are underperforming, engaging in high levels of deviance, and leaving the organization. Our theoretical extension to tournament theory indicates that this may occur in reaction to pay systems characterized by high hierarchical dispersion when people perceive differences between themselves and those who win the tournaments. In other words, tournament compensation systems may in fact create and magnify demographic differences between past tournament winners and other employees. This may lead to a downward spiral, whereby people from groups underrepresented in higher levels of an organization’s hierarchy perform worse and engage in both negative and exit behavior, which in turn decreases their odds of winning promotion tournaments. This then can lead to continued poor performance and negative behaviors for members of that group. Indeed, previous scholars have noted that it is often difficult to increase diversity in organizations (Avery & McKay, 2006) and this spiral that results from organizations with large hierarchical pay dispersion could be one reason for such difficulty.

Implications for practice

One implication for practice indicated by these propositions is that organizations can make informed choices about promotions and interhierarchical pay dispersion based in part on similarity between people in higher and lower levels of the organizational hierarchy. If the organization has some groups of people who are severely underrepresented at higher levels in the organization, one approach would be to limit the pay dispersion between levels. This should help mitigate perceptions of injustice—and resulting negative behaviors such as deviance and organizational exit.

Alternatively, organizations can target opportunities for development and promotion toward groups that are underrepresented at higher levels in the organization, and then increase the interhierarchical pay dispersion as a means of motivating everyone. Organizations may do well to weigh the costs and benefits of promoting an individual who may not be the best qualified, but whose promotion would maximize the beneficial effects of interhierarchical pay dispersion on other employees in a specific group. There may be contexts in which the indirect benefits of motivating groups of employees outweigh the costs of promoting an individual who is not the most qualified; in other contexts, selecting the best qualified employee for promotion may be the best decision regardless of what non-performance-related characteristics the employee may have.

A related point is that organizations must carefully monitor their promotion criteria to seek out and perhaps eliminate criteria that are simultaneously unrelated to performance and correlated with characteristics that are relevant to employee identities. Many organizations may have criteria that favor some groups even though such criteria are not relevant to the job. Such criteria will naturally skew tournament winners in a manner that causes the tournament to be ineffective and even dysfunctional for those who perceive themselves as different from the tournament winners.

Identities provide a concept that organizations may be able to leverage to enhance the benefits of tournament pay structures. Employees will generally have a constellation of identities rather than a single characteristic that encapsulates their full identity (Ashforth et al., 2008). Identities can vary in their salience in a given moment (Hogg & Terry, 2000), in part through priming processes in the environment (Leavitt et al., 2012). Organizations may be able to place and emphasize cues to specific identities that are broadly shared across a variety of employees, including people at higher levels in the organization. Thus, organizations may be able to increase the perceived similarity between a given individual and previous tournament winners, thereby maximizing the benefits of interhierarchical pay dispersion and minimizing the negative outcomes.

Future research

Aside from empirical tests of the predictions put forth in this paper, there are several other avenues for future research. One avenue is to examine dynamism in identities over time. As Leavitt et al. (2012) note, different identities can be salient at different times. It may be that there are changes in the groups that an employee tends to identify with over time. Consistent with research on surface- versus deep-level similarity (Harrison et al., 1998; Harrison et al., 2002), it may be that upon initially entering an organization, employees tend to identify with others who share surface-level characteristics with themselves, but eventually they go on to identify more with those who share deep-level characteristics. This may have important implications for how employees view promotions and large pay raises in tournament systems. For example, a Black female 30-year-old employee may initially look to see the promotion rates of other Black females who are relatively close to her in age, use this observation to estimate her own probability of obtaining a promotion and large pay raise, and adjust her effort and behavior accordingly. However, later she may come to focus on the promotion of employees who share deep-level characteristics.

Also related to time, future research should consider whether or not there is change in behavior from before and after a promotion decision is made. It may be that the effects proposed in this paper are especially strong right after an employee has been passed over for promotion; that may be a time in which employees are especially sensitive to fairness issues related to underrepresentation in higher levels of the hierarchy of those they perceive as similar to themselves. This may be the most important time to intervene to prevent low levels of effort or high levels of deviance and turnover intentions.

Given the importance of multiple identities to individuals (Ashforth et al., 2008; Hogg & Terry, 2000; Kulik et al., 2007; Leavitt et al., 2012), future research should consider nonadditive effects of multiple identities on how employees view tournaments (cf. Derous, Ryan, & Nguyen, 2012). Some identities may be more centrally held, or viewed as more predictive of odds of success in a tournament. Identities may combine in a nonadditive fashion. It may be that identifying with two groups that are both discriminated against is especially destructive for tournament compensation plans. Alternatively, it may be that some identifications are redundant, and perceiving that being similar to two groups that are both underrepresented as tournament winners is no worse than one group.

Another potential avenue for future research is considering how our propositions differ across organizational levels. There has been some research exploring the influence of organizational levels on pay dispersion. Studies have found that the relationship between compensation and hierarchical level is convex such that the pay spread needed to motivate employees to compete for the CEO position is much higher because CEOs do not have future competitions they can compete in (Lambert et al., 1993). In addition, the prize spread at higher levels of the organization is larger than at lower levels of the organization (Cappelli & Cascio, 1991; Lambert et al., 1993). In addition, Barnett and Miner (1992) noted that temps affect tournament structures at lower levels of the organization but not at higher levels of the organization due to lower perceived competition at higher levels. Similarly, Rosette and Tost’s (2010) finding that female leaders are perceived as more effective than male leaders at higher versus lower levels of the organization suggests that female employees who perceive dissimilarity to previous male promotees may respond more negatively to interhierarchical pay dispersion at lower levels of the organization relative to higher levels. Regarding identity enhancement strategies, it is possible that at higher levels of the organization, boundaries between employees and previous promotees may be perceived as more impermeable, resulting in social creative strategies used more often than social mobility strategies (Chattopadhyay et al., 2004b). Another potential effect could be that employees at higher levels of the organization with presumably longer tenure may have already overcome challenges related to demographic dissimilarities so these social categories are no longer salient. This would suggest that the attenuating effect of low levels of perceived demographic similarity on tournament effectiveness would be neutralized.

Finally, the role of outside hires within tournament structures is a possibility for future research. The effect of outside hires may be opposite to what Barnett and Miner (1992) found with temporary hires. Temporary hires may be less likely to be perceived as competition at higher versus lower levels of the organization but outside hires may have higher likelihood of being perceived as competition. Since the pool of employees that possess the experience, skills, and abilities required at higher levels of the organization is smaller, organizations are more likely to look outside of the company. This suggests that outside hires would influence tournament effectiveness at higher levels of the organization but not at lower levels.

Conclusion

Tournament theory is often used to generate pay policies that lead to high levels of hierarchical pay dispersion with gaps in pay between hierarchical levels especially noticeable at the top levels of the organization. Previously, tournament theory highlighted the benefits of such dispersion, indicating that it motivates all employees to attempt to win their promotion tournaments and thus obtain large pay increases. The assumption is that this system is more efficient than spreading the same pay across a larger number of individuals. However, drawing from social identity theory, we posit that the benefit of hierarchical pay dispersion is not universal, due to plurality in labor pools. Employees look to see if other employees in groups with which they socially identify ever win the tournaments. When they do not, not only are the motivational effects of hierarchical pay dispersion undermined, but negative outcomes such as organizational deviance and turnover are promoted. Thus, for some employees, tournament-based pay structures will not only be ineffective, but will backfire.

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