A central tenet of tournament theory is that interhierarchical pay dispersion promotes effort and performance among employees—regardless of who ends up winning the tournament—because all employees seek to win and thereby receive the large pay raise. However, drawing from social identity theory, we propose that plurality in labor pools has important implications for tournament theory. Specifically, we posit that the performance benefits from interhierarchical pay dispersion are especially large when employees perceive previous promotees as similar to themselves, but minimal when they perceive dissimilarity. Dissimilarity to past tournament winners reduces the perceived probability of success and enhances the perception of injustice in response to interhierarchical pay dispersion, resulting in reduced performance and increased organizational deviance and turnover. Moreover, the influence of perceived demographic similarity on tournament effectiveness is strengthened by social creativity strategies and identity salience but weakened by social mobility strategies. Thus, in some contexts, interhierarchical pay dispersion will not only fail to promote performance, but will backfire and instead promote negative outcomes.
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