Incentive Pay Is Key Factor In Gender Pay Gap

Incentive Pay Is Key Factor In Gender Pay Gap

An August 25th post in the Liberty Street Economics blog of the Federal Reserve Bank of New York focuses on the issue of the gender pay gap in the U.S. New York Fed analysts

The authors explain the crux of their argument about the cause of the gender gap in the introduction to the blog. “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).”

Female execs getting a smaller share of incentive pay leads to gender pay gap

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The research of emale executives receive a lower share of incentive pay relative to total compensation than male execs do. In fact, the data shows that this difference accounts for a solid 93% of the unconditional gender pay gap.

The chart above shows the average components of the most common “flow” measure of total compensation (TDC1) for males and females, which includes salary and incentive pay components connected to firm performance.

Males receive more compensation than females related to positive performance of firms

Gender Pay Gap

The authors also highlight that compensation of female executives is notably less sensitive to the performance of the company than that of males. They point to an example of a $1 million increase in firm value producing a $17,150 jump in firm-specific wealth for male executives, but a mere $1,670 boost for women execs. Of note, or every 1% increase in the market value of a company, compensation increases by $60,000 for males but only $10,000 for females.

The table above illustrates the results of regressions of the change in the exec’s firm-specific wealth on firm performance, a female dummy, and the female dummy’s interaction with the change in firm value. Note that gender differences in pay-performance sensitivity are large and significant in all cases.

Females penalized more for poor performance and rewarded less for positive performance than males

Gender Pay Gap

Finally, show that compensation of female management is more exposed to decreases in firm value and less exposed to increases in company value than males’. A key result of the study is that a one percent increase in firm value is associated with a 13% rise in firm-specific wealth for female executives, but stunning a 44% rise for male execs. By the same token, a one percent decrease in company value is associated with a 63% drop off in firm-specific wealth for female execs and a 33% decrease for males.

To exemplify the point, the authors make a sample calculation of exposure based on estimated pay-performance sensitivity and average changes in company market value. It turns out that female execs are less exposed to positive changes in firm market value and more exposed to negative changes in market value. Pay for female management decreased by 16% in total as a result of exposure to changes in firm market value, but on the other hand, pay for males moved up by 15% during the period sampled.

Finally, they spell out the dynamic that underpins the female gender pay gap: “Although female executives receive lower incentive pay and have lower pay-performance sensitivity, they experience greater exposure to negative changes in firm value and smaller exposure to positive changes in firm value (as a fraction of their average stock grant holdings) compared with male executives. So, overall, changes in firm performance penalize female executives while they favor male executives.”

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