PERSONNEL PSYCHOLOGY 2009, 62, 497–531 CONTINGENCIES IN THE EFFECTS OF PAY RANGE ON ORGANIZATIONAL EFFECTIVENESS SVEN KEPES Virginia Commonwealth University JOHN DELERY University of Arkansas NINA GUPTA University of Arkansas The degree of pay spread can influence many organizational level out- comes (e.g., workforce productivity and organizational performance), but empirical studies are inconsistent about the directionality of the ef- fect. We argue that it is not simply the width of the pay range but also the factors responsible for the width that explain the effects of the pay range on employee and organizational outcomes. We expect that when wider pay ranges are attributable to the use of performance-based pay, the effects of the pay range on performance are positive, but narrower pay ranges attributable to performance-based pay reduce this effect sub- stantially. By contrast, wider pay ranges attributable to politically based pay should have negative effects on performance, and this effect should be weakened when the pay ranges are narrower. Data from a sample of motor carriers generally support our predictions. Although wider pay ranges have positive effects, the results reveal a complex pattern of rela- tionships among the basis of pay allocations and pay range width on the one hand and workforce productivity and organizational performance on the other. Implications for future compensation and strategic human resource management research are discussed. Are organizations with a wider range of pay across employees more or less effective than those with a narrower range? At the individual level, theory and empirical evidence detail the benefits of merit pay and other performance-based incentives (e.g., Heneman, 1992; Jenkins, Mitra, Gupta, & Shaw, 1998; Lawler, 1971). Incentive pay tends to increase inter- nal pay differentials and widen the pay range. At the organizational level, wider pay ranges can have both positive and negative effects on organi- zational outcomes (e.g., Bloom, 1999; Bloom & Michel, 2002; Brown, Sturman, & Simmering, 2003; Shaw, Gupta, & Delery, 2002), and doubts continue about the effectiveness of merit pay. Our empirical knowledge Correspondence and requests for reprints should be addressed to Sven Kepes, Virginia Commonwealth University, School of Business, 1015 Floyd Avenue, P.O. Box 844000, Richmond, Virginia, VA 23220; skepes@vcu.edu. C  2009 Wiley Periodicals, Inc. 497