Abstract

A key set of decisions in the new venture formation process revolves around how to establish appropriate and motivational pay levels for members of the business (Wasserman, 2006). New ventures must decide whether the organization should adopt a relatively flat rewards structure wherein there are small differences in pay between those making the most in the organization and those making the least, or a more hierarchical structure wherein there are substantial pay gaps between top-earners and bottom-earners (Henderson & Fredrickson, 2001). Extant research provides equivocal guidance on the topic. In particular, behavioral theories of deprivation and tournament theory are at odds when it comes to the performance effects of pay gaps. With this study, we bring these contrasting theoretical perspectives more into alignment through the examination of their boundary conditions. Specifically, we argue that new venture organizational forms which inherently engender cooperation may reap the benefits of pay gaps without compromising cohesion and functionality in new ventures. We further argue, based on distributive justice literature (Forsyth, 2005), that this positive relationship between pay gaps and performance in cooperation-oriented new ventures will be moderated by the following factors: 1) business informality, 2) the business’s involvement in larger social movements, and 3) size of the business. Specifically, organizational members in new ventures will view pay gaps as less fair in informal (those not registered with the government) businesses, those heavily involved in broader social movements, and smaller businesses. Perceived injustice in organizations with these characteristics is expected to dampen the positive effects of pay gaps on cooperative new venture performance.

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