Wage dispersion, workforce incentives and hospital performance

Nonprofit hospitals rely more on intrinsically motivated employees because they can not afford paying higher salary than their for-profit counterparts. Instead, nonprofit hospitals can use wage dispersion as part of their compensation strategies to incentivize workforce (tournament effect). On the other hand, the perceived unfairness in wage dispersion can also offset the tournament incentives (cohesiveness effect). Wage dispersion is an issue that has attracted considerable debate amongst practitioners, academics, and politicians in recent years. In part, this has reflected a desire to understand the factors behind the worker incentive design and pay equity in both for-profit and nonprofit health care organizations. However, there is also a growing recognition that the relationship between wage distribution and firm performance depend on the skills of the workforce and the uncertainty of the firm economic environment. We studied the data set of employee wage dispersion of 48 non-profit hospitals in Maryland to quantitatively understand how different aspects of pay dispersions, worker skills, and staff sizes influence hospital performance. We found a positive effect of wage dispersion among low-skill workers on hospital performance and a negative effect of wage dispersion among high-skill workers on hospital performance. Interestingly, the staff size in each skill category tends to offset the aforementioned effects.