Personnel economics has suggested conflicting arguments about the impact of increased wage dispersion within firms on workers' productivity and firm performance. Besides giving more advancement incentives, bigger wage differentials might also give rise to less cooperation and more politicking amongst workers resulting in worse outcomes. We try to answer these questions using panel data for Austrian firms. As indicators for firm performance we use employment growth and standardized wages. For white-collar wages the following picture emerges: more dispersion leads to higher earnings up to some point where the relation changes its direction. For blue-collar wages we find a positive association between dispersion and standardized wages between firms, but no relation within firms over time. For employment growth the results are ambiguous.
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