School of Economics and Business, University of Ljubljana, Slovenia
This study explores the influence of pay dispersion and relative pay position on employee mobility, leveraging social comparison theory and the frog pond hypothesis. Drawing on prior research, it hypothesizes that higher vertical pay dispersion in firms reduces mobility, while greater horizontal pay dispersion increases it. Additionally, the dual relative pay position (RPP) concept is introduced, emphasizing the primacy of internal pay comparisons over external benchmarks in mobility decisions. Using a matched employer-employee country panel, the study analyses approximately 3.87 million observations (2006–2016). Probit regression models reveal that vertical pay dispersion discourages mobility, while horizontal dispersion encourages it, particularly among professionals. Findings also confirm that employees prioritize internal pay comparisons, as their high relative internal pay position and concurrently low external relative pay position reduces mobility likelihood. Conversely, relatively low internal along with relatively high external pay position increases mobility likelihood. This research advances compensation literature by integrating social comparison theory and providing evidence of bounded rationality in employee pay evaluations. The results underscore the importance of internal pay structures in mobility decisions, contextualized within a low-inequality labor market, and offer practical insights for organizational compensation strategies.
