We draw upon relational demography and social identity perspectives to argue that working with teammates who are dissimilar in pay grade can help individual team members reduce social uncertainty in their work relationships within the team, subsequently influencing their identification with the team, performance and turnover intention. This effect is more pronounced for team members in a lower pay grade because they are more sensitive to social influence owing to their lower status in the team. We test these arguments through a three-part survey of 203 employees from 33 work teams of a telecommunication company in China. Our data show that pay grade dissimilarity is associated with lower relational uncertainty, more for individuals with a lower pay grade, and that lower relational uncertainty, in turn, is associated with higher task performance, higher identification with the team and lower intent to leave the team. This paper contributes to the literature on pay dispersion by highlighting the importance of relative pay, especially for individuals who are lower paid than others, and uncovering the social identity related process underlying its effects. Post hoc analysis suggests that these effects are present especially when the pay system is perceived to be legitimate.