Why Top Female Execs Earn Less Than Men: Incentive Pay Gaps

March 30, 2015 by Victoria Stilwell

Even top female workers can’t catch a break when it comes to pay inequality.

Researchers at the Federal Reserve Bank of New York are out with a new paper on gender differences in compensation for executives. They analyzed pay for chairs/chief executive officers, vice chairs, presidents, chief financial officers and chief operating officers, and here’s what they found: female executives get less incentive pay compared to their male counterparts

Some 93 percent 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 researchers found. This was the case even after the economists controlled for things such as differences in title, tenure and age. Incentive pay includes things like bonuses and company equity and is meant to encourage executives to boost corporate performance.

Incentive pay leads to the buildup 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 $1 million, a male executive’s firm-specific wealth jumps by $17,150. For women, the increase is just $1,670, or less than a tenth.

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, females are more exposed to a decline in a company’s market value and benefit less from an increase.

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

“Overall, changes in firm performance penalize female executives while they favor male executives,” the paper states. And lest you think females 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…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 also have weaker networks that may limit their ability to control their own compensation. Men, on the other hand, who are more entrenched in an organization and can cash in favors after years in the industry, are more likely to be able to steer their pay in a way that’s more favorable for them.

So what’s a woman to do?

Because it’s pretty hard to get information on what other people in your organization are making, “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,” Stefania Albanesi, one of the authors and a research officer at the New York Fed, said in an interview.

The sooner you can do so, the better, because the disparities build year after year, she said. And while incentive pay was previously reserved for the C-suite, in recent years it’s 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 usually your past compensation is used in some degree,” Albanesi said. “These differences can be very, very persistent