Are Female Top Managers Really Paid Less?

The following post comes to us from Philipp Geiler of the Department of Finance at EMLYON Business School and Luc Renneboog, Professor of Corporate Finance at Tilburg University.

In our recent ECGI working paper, Are Female Top Managers Really Paid Less?, we focus on the gender wage gap of executive directors in the UK. In particular, we ask the question whether female top managers are paid less than their male counterparts, whether the gender wage gap is higher in male dominated industries (such as financial services etc.), and what effects female non-executive directors and remuneration consultants exert on pay.

The existence of the gender wage gap and the possible causes thereof remain an important and hotly debated topic. The literature proposes an impressive range of theories that may help to explain the existence of a gender wage gap, such as the ‘sticky floors’ idea (Booth et al., 2003), the ‘glass-ceiling’ concept (e.g. Arulampalam et al., 2005), occupational and industrial segregation (e.g. Blau and Kahn, 1994, Allen and Sander, 2002), the impact of corporate performance (Kulich et al., 2011), behavioral biases (e.g. Eagly et al., 1992, Eagly and Karau, 2002, Kulich et al., 2011), and the effect of pay consultants (e.g. Bender, 2003, Cadman et al., 2010). While some papers provide explanations for the gender pay gap of top executives, methodological sound measurement of the (evolution of the) pay gap is scarce as the number of women who actually make it to the very corporate top is still rather modest. Past analyses often compare the average or median size of the pay of male and female executives and draw conclusions on the potential causes of gender-based discrimination at the top-corporate level.

To address the idea of female discrimination at the pay level, we have built a very large dataset that includes details on the compensation of male and female executive directors for virtually all companies listed in the UK from 1996 until 2007. This enables us to put many of the above-mentioned ideas on the gender pay gap to the test and examine discriminatory practices for top level managers. We study whether differences are attributable to occupation and segregation, differences in pay-for-performance sensitivity, corporate governance structures, ownership structure, and the influence of remuneration consultants. We use a treatment effect estimation to compare the average pay e.g. in total compensation of female top managers, under discrimination to the average pay outcome of male top managers that are similar in a number of observable characteristics (firms size, industry, age, position, tenure, industry, and time). Our results can be summarized in six main points:

  • 1. Our treatment effect analysis unveils little evidence of pay discrimination at the CEO level.
  • 2. There is strong pay discrimination at the executive director level (including the deputy CEO, CFO, etc.).
  • 3. The contracts of female CEOs are even more strongly related to both accounting and market-based performance than those of male CEOs.
  • 4. We find that the pay-gap is lower for female executive directors when the firm has one or more female non-executive directors on the board.
  • 5. The gender pay gap is considerably smaller in ‘male’ industries such as financial services or ICT.
  • 6. Seeing the advice of top remuneration consultants reduces the pay gap for female CEOs.

These results suggest that gender equality at the very top has been nearly achieved, but also that discrimination persist at the sub-top level: the female executive directors in our sample earn over a five-year tenure period £1.3 million less than male directors. The reason for the discrimination at the executive director level but not at the CEO level is that executive directors are less visible as they are not the figureheads of the corporation. Moreover, we document that the contracts of female CEOs are more sensitive to both accounting and share price performance. This contradicts the findings of Kulich et al. (2011) who argue that female managers are considered to be more risk averse and are consequently offered contracts with lower performance sensitivity. Do female non-executive directors on the board improve the situation for the female managers? Our analysis shows that the gender-based pay gap is indeed somewhat lower in such firms. While some would regard this as evidence to plead for a minimum ratio of women on the board to tackle gender-based discrimination, it is important to interpret this result with caution because our analysis cannot discern how active non-executive female directors are in terms of reducing the glass ceiling and the female pay discrimination. When examining industries with a high concentration of male executives, however, we observe that the gender wage gap is not greater which contradicts the idea that women are less appreciated in a dominantly male environment (as suggested by Allen and Sander, 2002). Lastly, we document that seeking the advice of top remuneration consultants substantially drives up total remuneration, and is beneficial for female CEOs as the pay gap is reduced in such firms.

The full paper is available for download here.

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