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Female executives get less incentive pay, says US study

Published on Saturday, 28 Mar 2015
US President Barack Obama signs proclamations last April aimed at eliminating salary disparities between men and women. Photo: Bloomberg

Female executives get less incentive pay compared to their male counterparts, US researchers have found in a recent study.

A paper on gender differences in compensation for executives, published by the Federal Reserve Bank of New York, analysed pay for top executives. Some 93 per cent of the difference in total pay between male and female executives is rooted in incentive pay, particularly the value of stock options and grants, the research found. This was the case even after the economists took into account things such as differences in title, tenure and age.

Incentive pay includes things such as bonuses and company equity and is meant to encourage executives to boost corporate performance.

 Incentive pay leads to the build-up of what the authors call “firm-specific wealth”, as it accumulates on past years’ flow of stock options and grants. Even small changes in a company’s stock price can lead to big swings in the value of this type of compensation.

As a result, female executives’ compensation is less sensitive to company performance.

For example, if a company’s value climbs by US$1 million, a male executive’s firm-specific wealth jumps by US$17,150. For women, the increase is just U$1,670 – less than a tenth of the men’s figure.

This makes sense in the context of the previous finding, because their incentive compensation tied to the company’s equity tends to be lower. Even so, women are more exposed to a decline in a company’s market value and benefit less from an increase.

 A 1 per cent decline in firm value translates into a 63 per cent drop in firm-specific wealth for female executives, compared with only a 33 per cent decrease for male executives. Similarly, %a 1 per cent rise in a company’s value corresponds to a 44 per cent rise for male executives and only a 13 per cent increase for women.

 “Overall, changes in firm performance penalise female executives while they favour male executives,” the paper states. And lest you think women were being punished through pay because they were more likely to run their companies into the ground, “there are no significant differences in firm performance by gender”, the researchers found.

The root of the problem may be illuminated by an idea in corporate finance literature known as “managerial power”. This theory holds that executive pay is not efficient and is controlled by “entrenched managers who hold board captives and are able to set the terms of their own pay”, according to the paper.

In this scenario, the goal of the executive is to prevent pay from going down when firm performance is suffering and trying to boost pay when the company is doing well.

Top female executives are usually younger and less tenured than their male counterparts, and they have weaker networks that may limit their ability to control their own compensation.

Men, on the other hand, who are more entrenched in an organisation and can cash in favours after years in the industry, are more likely to be able to steer their pay in a favourable way.

So what can woman do? Because it is pretty hard to get information on what other people in your organisation are making, “increasing transparency in general in an organisation, but specifically with how your pay is set relative to others in similar positions, is going to be helpful”, says Stefania Albanesi, one of the authors and a research officer at the New York Fed.

 The sooner you can do so, the better, because the disparities build year after year, she says. And while incentive pay was previously reserved for the C-suite, in recent years it has become used for lower levels of professionals. That means the gaps in pay start forming earlier.

“The accumulation is going to be there even when women get promoted, and also possibly if you move to another firm because your past compensation is usually used in some degree,” Albanesi says. “These differences can be very, very persistent.”


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