Should Leaders Organize Employees on Work Teams by Pay Grade?

Key takeaways

• Team members who work with teammates belonging to different pay grades identify more with their teams, perform better and are less likely to leave.
• These effects occur because pay grade dissimilarity drives down uncertainty regarding appropriate attitudes and behaviors toward teammates –– which in turn leads to positive outcomes.
• Pay grade is an often overlooked aspect of team composition that leaders should pay attention to in improving team member outcomes.

In many organizations, people work in teams with others in different pay grades, with certain team members making more money than others by virtue of their membership in a higher bracket. However, pay grade is not often a relevant aspect of team composition for leaders assembling a team.

But what if those pay disparities actually stabilized teams and increased their performance?

By studying over 40 marketing teams at a Chinese firm, we discovered that pay grade differences can help team members reduce uncertainty about how to relate to one another, identify more with their teams, increase task performance and reduce turnover.

As it turns out, pay grade is relevant to team members and, because pay grade reflects the skill, education and performance levels of team members, it provides a legitimate and stable basis to differentiate among high- and low-status teammates.

When pay grade disparity among team members is greater, there is a clearer distinction between those who are in charge and those who are not, enabling team members to more accurately discern their roles within the team status hierarchy. When team hierarchy is clearer, team members are more likely to understand their own status within the team, particularly with regard to whether they should lead, provide directions and take charge or act as followers who take direction and listen to their higher-status teammates.

As team members better understand how to interact with the team, their reduced uncertainty allows them to enjoy more positive experiences within that team. This, in turn, helps enhance team member identification with the team, improve individual performance and reduce turnover.

The results were found to be stronger among those in lower pay grades because they are more sensitive to social cues. Member in higher pay grades may experience greater uncertainty as they have to take charge and provide direction to the team.

When coworkers fall into the same pay grade, they may compete more with each other to establish status or position. This may make it more difficult to establish clear norms of interactions, and increase uncertainty as to the appropriate behaviors and attitudes in engaging with teammates.

When this uncertainty is higher, team members may find it more difficult to think of how their core values and attitudes fit in with the team, so that they identify less with the team. They may find it more difficult to establish effective patterns of task completion, leading to lower performance. And when tasks and relationships are negatively affected this way they may choose to leave the team.

Our findings highlight the importance of leaders paying attention to pay grade distribution when deciding on team composition.