Gender pay gap among executives even worse than you thought

Photo courtesy of Christoph Lehmann on Flickr

Photo courtesy of Christoph Lehmann on Flickr

Rob Swystun, Pristine Advisers

Well, this is depressing …

Just when you thought the gender pay gap couldn’t get worse, it’s gotten worse. Or, rather, it was this bad all along, but we’ve just noticed that it’s actually worse than originally thought.

As reported by Shane Ferro in Business Insider, the Federal Reserve Bank of New York recently released a report entitled Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives that explores gender differences in executive pay. It found that in addition to men being paid more in general (which we all knew), men’s compensation packages are structured in such a way that they get paid more than female executives when the company is doing well and their pay gets docked less when the company is performing poorly.

As Bloomberg financial columnist Matt Levine quipped, “it’s heads men win, tails women lose.”

To sum up what the researchers say in easy-to-digest bullet point form:

  1. Female executives receive a lower share of incentive pay in total compensation relative to males.
    – This difference accounts for 93% of the gender differences in total flow compensation.
  2. The compensation of female executives displays a lower pay-performance sensitivity relative to males.
    – 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.
  3. Female executives’ pay is more exposed to bad firm performance and less exposed to good firm performance than for males.
    – A 1% increase in firm value generates a 13% rise in firm specific wealth for female executives, and a 44% rise for male executives. 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.

Potential reasons for the wage disparity that the researchers considered were that:

  • women are generally younger, and therefore less senior with lower pay;
  • women are more risk averse; and
  • women tend to spend fewer hours at work than their male counterparts (although, at the executive level, the difference is much lower than in the general population).

However, the researchers concluded that none of these reasons adequately explain the huge pay discrepancies, nor the performance-based discrepancies.

What they do believe explains at least part of it is the access to informal networks that men have access to, which is to a greater degree than their female counterparts. The report authors say men are more entrenched, giving them more bargaining power for contract negotiations.

The solution, according to report co-author Stefania Albanesi, is increasing transparency because “increasing transparency in general in an organization but specifically with how your pay is set relative to others in similar positions is going to be helpful.”

An ongoing trend is to give people further down the corporate ladder performance-based pay and more transparency will ensure that pay is fair and square.

“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,” the authors write in their report.

The problem of the gender pay gap has been recognized for a long time now. With this new evidence that reveals it’s even worse than thought before, will organizations now start the process of restructuring themselves to eliminate it? Hope says yes, but general common sense says probably not.

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