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Wednesday, August 26, 2015

'Incentive Pay and Gender Compensation Gaps for Top Executives'

Stefania Albanesi, Claudia Olivetti, and Maria Prados at the NY Fed's Liberty Street Economics:

Incentive Pay and Gender Compensation Gaps for Top Executives: The persistence of a gender gap in wages is shaping the debate over women’s equality in the workplace and underscores the challenge facing policymakers as they consider their potential role in closing it. While the disparity affects females at all income levels, women in professional and managerial occupations tend to experience greater gender-pay differences than those in working-class jobs. The rise in the use of incentive pay, which has been linked to the growth of income inequality (Lemieux, MacLeod, and Parent), might have contributed to the gender gap in earnings (Albanesi and Olivetti). In this post, which is based on our related New York Fed staff report, we document three new facts about gender differences in the structure of executive compensation.

 Evidence on Gender Differences in Executive Pay

Our research focuses on the top five executives by title in public companies (chair/chief executive officer (CEO), vice chair, president, chief financial officer, and chief operating officer) in Standard and Poor’s ExecuComp database between 1992 and 2005. Only 3.2 percent of people in these roles are women.

Fact 1: Female executives receive a lower share of incentive pay in total compensation than males. This difference accounts for 93 percent of the unconditional gender gap in total pay. ...

Fact 2: Compensation of female executives is less sensitive to firm performance than males’. For example, a $1 million increase in firm value generates a $17,150 increase in firm-specific wealth for male executives but only a $1,670 increase for females. For each 1 percent increase in firm market value, compensation rises by $60,000 for men and only $10,000 for women. ...

Fact 3: Compensation of female executives is more exposed to declines in firm value and less exposed to increases in firm value than males’. We find that a 1 percent rise in firm value is associated with a 13 percent rise in firm-specific wealth for female executives and a 44 percent rise for male executives. Conversely, a 1 percent decline in firm value is associated with a 63 percent decline in firm-specific wealth for female executives and a 33 percent decline for males. ...

Are these gender differences in compensation efficient?

Surveys of professionals and executives, time-use studies, and experimental and psychological studies suggest that:

  • Exclusion from informal networks, gender stereotyping, and lack of role models are perceived as substantial barriers to career advancements for female executives.
  • Married female professionals bear a disproportionately large share of childcare responsibilities relative to married men in similar circumstances.
  • Women display lower propensity to enter into competitive environments.
  • Women display lower propensity to initiate negotiations.
  • Women exhibit higher risk aversion.

Based on the efficient paradigm of the pay-setting process, these gender differences in barriers to career advancement and preferences are consistent with Facts 1 and 2, but they would imply lower performance for firms headed by females, an outcome for which we find no evidence in our data. Moreover, this framework cannot explain Fact 3.

We find instead that the gender differences in pay and pay-performance sensitivity are consistent with the “skimming” or “managerial power” view of executive compensation. According to this theory, board members are captive to executives, who use that position to influence their compensation packages in a way that increases their average pay and undermines incentives. In this scenario, the goal of the executive is to prevent pay from falling when firm performance deteriorates and to boost pay when the company is doing well. However, as we document in our paper, top female executives are less entrenched than their male counterparts, since they are usually younger, with fewer years of tenure and weaker networks. Thus, they are more limited than male executives in their ability to control their own compensation.

Our analysis suggests that performance pay schemes should be held to closer scrutiny. Increasing transparency about an executive’s compensation, both in absolute terms and relative to counterparts’, might mitigate gender-pay inequality for top executives. A recent Securities and Exchange Commission ruling that says that companies have to disclose whether executive pay is in line with the company’s financial performance seems to be a good step in this direction.

Our findings also raise concern about the standing of all professional women as incentive pay schemes proliferate outside the executive ranks. The failure of the efficient contracting paradigm to explain the gender differences in the structure of executive compensation points to possible distortions in the link between pay and performance. To the extent that performance pay amplifies earnings differentials resulting from actual or perceived differences in attributes between workers,  it can exacerbate inequality and can severely distort the allocation of resources, if designed incorrectly.

    Posted by on Wednesday, August 26, 2015 at 12:17 AM in Economics | Permalink  Comments (3)


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