4. Conclusion
This study attempts to clarify whether the tournament theory or cohesiveness hypothesis dominates in the relation between salary dispersion and team performance. The tournament theory (Lazear & Rosen, 1981) proposes that employees' efforts are induced by the spread between the earnings of each position. The team-cohesiveness hypothesis (Levine, 1991) suggests that narrow wage differentials can improve cohesiveness and productivity in an organization. The current empirical literature regarding the relation between salary dispersion and team performance provides inconclusive evidence. Many of the latest studies use payroll in the level form, while some research executes a data transformation for payroll. We thus explore the issue by comparing the results controlled by the different expressions of payroll. We use the relative position of team payroll as one of the control variables and compare our findings with the results based on the absolute level of team payroll. Our estimation results based on the dynamic panel method suggest that compensation does play a role in team performance. In terms of salary dispersion, its negative effect on team performance turns somewhat weaker when a team's relative payroll position variable replaces the payroll level variable. Salary dispersion shows a negatively significant effect on team performance when the level of pay is included as a control variable. However, salary dispersion has an insignificant effect on team performance when the relative level of payroll is used as a control variable. Thus, the findings based on the team performance result suggest that the team-cohesiveness hypothesis is supported over the tournament theory, but a team's payroll rank in MLB is a more robust explanatory variable than a salary dispersion variable is. We may infer that inter-team payroll disparity contributes more to team performance than the structure of intra-team salary dispersion does. In the future, we can investigate the effect of salary dispersion on individual players' performance. This further study will allow us to achieve a broader knowledge of the impact of salary dispersion on performance.
