The effect of social capital, salary compression and equity on individual and organizational performance

This study links theories of social capital, salary compression and equity in an attempt to better understand why certain individuals and organizations outperform otherwise similar counterparts. Empirically, the thesis employs three data sets in order to account for some standard phenomenon such as wage differentials for employees, earnings differentials for the self-employed and the effect of salary compression on individual and organizational performance. The thesis begins with an introductory chapter that motivates the analysis through a discussion of its potential importance in both policy and practice. The chapter also integrates the concept of social capital with theories of equity-efficiency and human capital. Applications of the general model are subsequently presented in three self-contained papers. The first paper asks what tradeoff, if any, exists between higher wages and greater supervisory control of workers. The paper tests whether workers with less supervision receive, when holding other observable characteristics constant, higher wages on average than those who are supervised to a greater degree. The paper finds strong support for the notion of a tradeoff between supervision and wages, which in turn, lends support to the efficiency wage hypothesis and the idea that high performance workplaces can mitigate higher labor costs with lessened supervisory burdens. The second paper integrates theories of social capital with lending circles for the self-employed. The paper posits that social capital--social relations that facilitate individual action--is essential for micro-entrepreneurial success. This study addresses three questions: First, does peer-centered lending have a positive effect on the success of self-employed individuals? Second, is social capital an important and significant determinant of self-employment success? And third, what role does community structure and ethnicity play in increasing individual social capital? Data on self-employed individuals in Toronto, Canada was used. The data was collected in 1998 from a telephone survey that was designed and supervised by the author. The results generally conform to the expectations of social capital theory: earnings are positively related to social cohesion as measured by the closeness of familial ties, membership in clubs and organizations, and the use of informational networks for business and career advancement. The final component of the thesis presents and extends several models that link compressed salary structures (pay structures where the spread between the top and bottom earners is low) with improved organizational performance. The paper also argues that individual performance is, under certain conditions, negatively affected by intra-organizational salary inequality. The paper empirically evaluates the compressed salary hypothesis using data from the National Hockey League (NHL) over a five-year period. This study is the first to examine whether pay inequality in the NHL (as measured by the degree of salary dispersion within a team) has any causal effect on both team and individual performance--holding constant such factors as total team payroll, managerial experience and individual player skill.