A fascinating report released by the Federal Reserve Bank of New York in March 2015 examines gender differences in executive compensation. The report, titled “Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives,” used data from Standard & Poor’s ExecuComp database to look at the compensation of 40,704 executives (1,312 of whom were female).
The key findings of the report are:
- There is no link between firm performance and the gender of top executives. Thus, the gender pay gap at the executive level cannot be explained by performance differences.
- 93% of the gender pay gap among top executives is accounted for by the fact that female executives receive a far lower percentage of incentive pay — namely, stock options and stock grants — as a percentage of total compensation.
- Women’s compensation has “lower pay-performance sensitivity,” meaning that they gain far less from the positive performance of their firms. When a firm’s value increases by $1 million, it leads to a $17,150 increase in firm-specific wealth for male executives and a $1,670 increase for females.
- In contrast, women suffer more when a firm loses value: “A 1% increase in firm value generates a 13% rise in firm specific wealth for female executives, and a 44% rise for male executives, while a 1% decline in firm value generates a 63% decline in firm specific wealth for female executives and only a 33% decline for male executives.”
It bears repeating that the authors showed that there was no link between the standard measures of firm performance and female representation in the team of top executives. Thus, women’s performance does not account for differences in compensation. Note, too, that the authors controlled for variables such as age and years of firm tenure.
Key is the exploration of why, when women have a lower share of incentive pay in total compensation as compared to their male peers, they face greater exposure from negative firm performance. The authors posit that women “might be considerably less entrenched and exert lower control on their own compensation than their male counterparts on average.” This may be due to factors that include women’s reduced access to informal networks (including with members of the board of directors, who are typically responsible for setting executive pay), their younger age on average, gender stereotyping, and inhospitable firm cultures. Interestingly, the gender pay gap was far smaller in firms that are headed by a female CEO. (This is, to some extent, a product of the CEO/Chair typically being the most highly paid executive.)
On the individual level, female executives should consider negotiating for higher incentive pay that is more comparable to that of their male colleagues. But to effectuate real change, it will be important for companies themselves to scrutinize their performance pay schemes:
“To the extent that performance pay amplifies earnings differentials resulting from effective or perceived differences in attributes across workers, if designed incorrectly, it exacerbates inequality and discrimination and can severely distort the allocation of resources. Our analysis suggest that performance pay schemes should be held to closer scrutiny and raises a note of concern for the standing of professional women in the labor market as incentive pay becomes more prevalent.”
Kudos to authors Stefania Albanesi, Claudia Olivetti, and María José Prados for their work. Hat tip to FiveThirtyEight. Photo © lukas_zb/iStockphoto.
