It is ironic that in a world that is clamoring for gender equality, the fair sex is still discriminated against in many matters. One of the main areas where this discrimination exists is the compensation received by executives, especially when the posts get higher. The education system in the United States, like in most parts of the world, is aimed at creating employees and not entrepreneurs. Hence, for most of those who enroll in colleges (including business schools), the options open to them would be to study hard and get a good job with a fat pay check. In such an instance, the compensation they receive will be very important to them since the quality of their lives depend on it. In spite of being equally qualified and even capable, one can find many instances where men outperform women when it comes to the size of their paychecks. There are a few reasons for this, some of which can be solved by the women themselves. But there are reasons like issues of feelings of male supremacy where women find themselves helpless in getting equal compensation.
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This paper attempts to study the salary differences of male and female executives and analyze the main reasons for this state of affairs. After a brief review of compensation itself, the paper will briefly discuss the salary differences, after which an analysis will be made. A discussion on relevant compensation theories like Human Capital Theory, Signaling Theory, social capital theory, social bias etc will also be present. A section on how these theories affect salary differentiation will also be included. The paper will end with an appropriate conclusion summarizing the whole situation with appropriate suggestions based on published scholarly literature.
Salary difference among male and female executives
There is enough evidence to suggest that there exists a gender gap with regard to pay among executives in the country. Other issues like promotion opportunities, lack of involvement in decision making etc also are seen. Another prominent fact is that the percentage of women executives in gets lower as the climb up the corporate ladder takes place. Another factor is that the compensation gap gets bigger with regard to the top managerial posts in an organization. Most of the information given in this section has been basically sourced from reputed magazines like Fortune or news sites like CNN. The Equal Pay Act of 1963 bars employers from compensation discrimination on the basis of sex. An excerpt from the Act is given below. “No employer having employees subject to any provisions of this section shall discriminate, within any establishment in which such employees are employed, between employees on the basis of sex by paying wages to employees in such establishment at a rate less than the rate at
which he pays wages to employees of the opposite sex….” (Sec 206, [Section 6] (d) (1), Minimum Wage, The Equal Pay Act of 1963). The US Equal Employment Opportunity Commission). http://www.eeoc.gov/policy/epa.html. But this has not yet been implemented uniformly even after forty four years of its passing. The 2005 issue of Fortune magazine states that women are paid less than men across all job sectors and positions. This appears to be the case in all the OECD (Organisation for Economic Co-operation and Development) countries. “The average difference is more than 15% and exceeds 20% in some countries – in the US, men earn 22% more”. (The Glass Ceiling: Will We Ever Break Through? Address by The Honorable Ambassador Constance A. Morella, U.S. Mission to the OECD, Gender Mainstreaming and Regional Aspects of the Labor Market Conference May 17 & 18, Bratislava, 2007, Department of State, United States of America). But it is heartening to see that many women executives and employees are now suing their employers for many discrimination issues, including salary differences. According to Fortune magazine, Boeing had to pay 72 million and Wal-Mart 1 billion USD to settle law suits initiated by female employees of both companies. The magazine also states that mothers in the country too are discriminated against both in terms of finding a job as well for compensation. The number of children also had a negative effect on compensation as mothers with more children were offered a lower pay. A survey conducted by International Survey Research in 2007 also confirms that pay inequity exists between the sexes holding executive positions. “However, when asked to judge internal pay equity (i.e., fairness of pay), the similarities between female and male executives end. Senior females are significantly less confident than are senior males that they are paid fairly compared to others in their department (62% vs. 72%) and to people in other departments (46% vs. 57%). (Gender differences among senior managers: pay, Press release, ISR – International Survey Research). http://isrsurveys.org/pdf/media/PressReleaseFeb172002.PDF. The situation is similar for executives and CEO’s in not for profit organisations also according to the Chronicle of Philanthropy, dated September 2006. Women CEOs got 26% less salary than their male counterparts. In another study on the accounting profession, women executives were found to earn 12,500 USD less than men executives. (Discussion, Page 33, Bruce M. Bird, J Harrison McCraw, John R. O’Malley, Enterprise Accountants, Managerial Status And Gender Salaries, Journal of Diversity Management, Vol 2, No 3, 2007). It can be seen that women executives are paid less than males in all sectors and at all levels of jobs. The next step is to discuss relevant theories and to analyze the main reasons for this disparity.
Human Capital theory
A review of literature has shown that the most discussed theory with reference to compensation in general and also with regard to pay difference among male and female executives in the human capital theory. The human capital theory, which had its roots in the 1940s, basically states that the earning potential of an employee can be increased with education. In other words, the income of an employee is directly proportional to the quality and level of education he or she holds. The theory originally focused on school education as a means of increasing the earning capacity of wage earners. But later additions and ideas came to the conclusion that it is just not school education that mattered. This was because the complexity of jobs had increased over the years and the importance of management had become more prominent. The general belief now is that human capital is now directly related to continuous improvement, lifelong learning, organizational learning etc. So, human capital can be defined as “the stock of knowledge, skills and abilities, which can potentially help increase productivity and performance at work and also life in general”. (The Concept of Human Capital, Page 2, Kari Hietala, Ministry of Labor, Human Capital, Published by the European Commission).
Human capital, like other forms of capital is subject to aging or being obsolete. This can be technical aging or economic aging. Technical aging occurs when a person’s technical knowledge becomes obsolete or when he or she is unable to cope with the technical changes required for the job. Economic aging refers to keeping up with the fast changes that happens in the job environment. A person must learn and run fast enough to keep up. Otherwise he or she runs the risk of premature aging. The female executive must be at risk more here since she plays multiple roles (other than being an employee). This factor is discussed in more detail in the coming sections. Anyway study of literature has proven that in equal circumstances, the human capital theory holds good in terms of equal pay for both men and women. That is to say that there is no significant salary difference between the pay scales of both sexes. This has been discussed in more detail in the section of theories and income discrimination. There have been criticisms as to the effectiveness of human capital theory in some quarters. According to the paper, the signaling theory is could be more relevant in understanding productivity and quality of an employee. The theory states that it is the actual productivity and the quality that matters and not his education and learning. The latter is only an job pre-requisite or an additional qualification. It could be that a person without too much education may excel himself in the field of sales when compared to another that holds a business degree.
Social Capital theory
Social capital theory is loosely based on the well known cliché of “Its not what you know, but who you know” that matters. In short, the benefits that advantages that person has is largely dependent on his network of friends, relatives, associates and superiors. If a person has a large network of the above categories and maintains good relationships with them, he or she may be a more advantageous position when compared to a less networked person. Some of the factors that are important to the concept of social capital are given here. A person’s social capital increases when he or she participates more in voluntary activities. This also holds good for the level of networking that is developed and maintained over a period of time. The level of mentoring, interaction and mutual support within an organisation is also crucial in increasing this asset. Higher social capital will give a person more bargaining or negotiating power. A person with high social capital will find greater equality with others in the organization. He or she will also find it easier to solve any problems or issues. A person will low social capital will need to exercise authority, rules, and regulations to control things. with regard to job prospects also they are at an advantage. “Specifically, they are more likely to be promoted faster, receive higher salaries, be favorably evaluated by peers, miss fewer days of work, live longer, and be more efficient in completing assigned tasks”. (What is social capital? How does it differ from human capital and social capability? Page 5, Michael Woolcock, (2001) ‘The place of social capital in understanding social and economic outcomes’, Isuma: Canadian Journal of Policy Research Volume 2, No1, Pages 1-17). (Please remove web link after citation and show as journal). The argument here is that women executives are hindered by many factors in developing social capital when compared to their male counterparts. The relevance of social capital in pay difference among males and females is discussed in the coming sections.
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The Merriam Webster Dictionary defines bias as “an inclination of temperament or outlook ; especially : a personal and sometimes unreasoned judgment”. This indicates that the view is inclined towards something and could be unreasonable. Hence existence of bias could mean not being balanced or just. Bias can happen in many fields including the society we live in. It could be based on race, class, color, religion, money etc. Literature regarding pay difference among the sexes indicate that it is the under-representation of women especially among the top positions. This type of bias could be classified as in-group bias. This type of bias happens when members of a particular group extend preferential treatment to members of that particular group. In such situations, thethe members value their qualities as higher than those of the out-group or outsiders. They may also perceive their products or services as superior to the out-group. The third factor is that “they apportion rewards so as to favor themselves and to disfavor outsiders, even when it costs them some portion of the reward to create the inter-group difference in apportionment”. (Sociality and ethnicity, Page 14, Donald L. Horowitz, Structure and Strategy in Ethnic Conflict, 1998, Paper prepared for the Annual World Bank Conference on Development Economics, Washington, D.C., 1998). In this case, one group will be the men executives and the other the women executives. If the men who are obviously superior in terms of numbers see themselves as a particular group and start to have this in-group bias, then there is a strong chance that they may perceive themselves as mentioned above. A study of literature shows that this social bias is also one of the reasons for salary inequality. This will also be reviewed in the coming sections.
Social Bias, Human Capital Theory and income discrimination
According to the Human Capital Theory, (mentioned earlier), there should be no pay discrimination between male and female executives if their human capital is similar or equal. Hence a male executive and a female executive have similar qualifications, skills and experience, both of them should get similar compensation. In this case, it is assumed that both are working in similar-sized organizations (or in the same organization) where pay scales are similar. The social bias theory assumes that bias is significant if the total number of persons biased against is very small when compared to others. So it assumes that pay discrimination could be due to the lesser number of women in executive positions in the country. A significant study, ‘The Gender Gap in the Boardroom: Are Women Executives Underpaid?’ involving 25,876 executive-year observations (which included 1171 female executive-year observations) of top executives in the USA, examines the relationship between gender bias with reference to both the social bias theory and the human capital theory. The paper readily admits that there is a pay gap of 27% among male and female executives in the country. The study then attempts to analyze this difference and attribute it to either of the above theories mentioned above. The paper states that (quoting from various other studies) human capital and compensation with regard to pay differences was not relevant prior to the 1990’s since top positions held by ladies was very low. A study conducted in 2001 shows that pay difference was as high as 45% by the late 1990’s, but the gap was coming down gradually. Even though there was a difference in pay scales (mentioned earlier) between men and women executives with the same social capital, it was concluded that the human capital theory is applicable in this case. The difference of 27% mentioned above arose due to some significant variables which are given below. (Results, Page 14, Mark Anderson, Rajiv Banker, Rong Huang and Jiangxia Liu, Paper Presented at the American Accounting Association Annual Meeting, Anaheim, CA, 2008). (Please do not show as website). The number of women executives was still very low when compared to their male counterparts. The figure only comes to 4.5% of the total. The majority of the women were employed in smaller companies even though they held the same or similar positions. In case of positions in similarly sized companies, the pay difference if any was negligible.. Other factors include shorter careers, male ability to interact more with the various components in the organization as well as the society, longer working hours available to men, the multiplicity of roles played by women etc. (McBrier, D. B. (2003). Gender and career dynamics within a segmented professional labor market: The case of law academic. Journal of Social Forces, Volume 81, Pages 1201-1266, University of North Carolina Press). (not a website) The paper also mentions that due to these reasons, employers are not able to exploit the capabilities and qualifications of women to the same extent as men. So in a sense, their social capital contribution is lower when compared to the contribution by men executives. But these are not issues that can be solved easily due to the inherent biological and social differences that exist. Hence if these factors were taken into account, the human capital theory is applicable to both men and women. In other words, with similar qualifications, experience, post, and organization, there was no significant difference in the pay scales of both men and women executives. On the other hand, it was found that the social bias theory is more relevant in this instance. The pay difference was significant because the representation of women as top executives in organizations across the country was very low in terms of numbers. Men outnumbered women to a huge extent. The authors’ hypothesis that the pay gap differences come down significantly in the case where the number of women and men executives was equal is proved correct. It could also well be the case where female executives outnumber men.
Social capital theory and income discrimination
Another relevant study considers the social capital theory as a reason for gender discrimination in pay. The journal article appeared in the 2007 issue of Advancing Women in Leadership online journal. The study refers to other research work on the topic, but also goes a step further by the hypothesis that pay discrimination can be reduced if women employees were able to make use of the social capital theory with reference to their clients as well as with their colleagues. As mentioned earlier, social capital theory deals with the effectiveness of networking with people in the organization and the society and the benefits that can be derived out of it. This paper also states what has been mentioned in the earlier section, namely that even though the number of women in top executive positions has increased, men still outnumber women to a great extent. This is an indirect reference to the social bias theory. Referencing from other studies, it has been found (as in the previous study) that income difference is substantial between men and women of equal positions. It also states here that men were promoted more frequently than women and also that the latter had less autonomy and involvement in decision making. There were other factors like women having less social capital, especially at the beginning of their careers than men. Opportunities for development were also significantly more for men. But these observations were made during the 1990s and hence not given importance here. The paper also states that there is no significant difference for capable women executives to hold top posts when compared to similarly qualified men. “In fact, previous studies have even indicated that no substantial difference exists in opportunities available to men and women for advancement to the top of the firm in areas of professional practice, such as law, accounting, architecture, engineering consultancy, and advertising”. (Gender and the Network Structures of Social Capital in Professional-Client Relationships, Yuliani Suseno, Ashly H. Pinnington, and Dr. John Gardner, Advancing Women in Leadership Online Journal, Volume 23, 2007). Even if this is the case, the authors argue that there is still a glass ceiling that prevents women executives to be on par with men with regards to compensation. Another factor of difference in compensation was that men were more likely to switch jobs and were likely to get better salaries with each change of jobs. Family and social obligations prevent women from taking such a move. There is very little evidence from these studies to show that the pay difference is due to gender discrimination. That is to say that women are not paid any less just because they happen to be women.
The main focus of this paper is networking and interaction. The paper gives many results from studies which show that interaction and social networking among colleagues can in fact, increase social capital, thereby leading to increased pay as well. What is important in increasing social capital is to know the right persons. If a person has more networking when compared to another (with the same attributes and qualifications), the former will have a better chance of increasing salary (also through bonus and other benefits). The problem with women is that they cannot develop the same level of interaction and intimacy as men can, especially with other men. They are disadvantaged in this respect.
There are two significant factors in social capital theory namely centrality and non-redundancy. Centrality refers to the importance that a person holds in the network he/she has built up. “The network positions that usually offer high levels of social capital are positions with a high degree of centrality”. (Structured social capital of groups: A social network perspective, Page 121, William L. Gardner, Bruce J. Avolio, Fred O, Authentic Leadership Theory and Practice, Published by A1 Books). (Pl show as book source) Hence, higher the centrality, higher the social capital. Non-redundancy refers to maintaining close relationships with all the contacts developed by the networking. This will also help in increasing the social capital. Increasing social capital with regard to clients will also be helpful in increasing social capital and also the compensation received. The particular journal article that is being discussed in this paper argues that female professionals can increase their total compensation if they see to it that their centrality in the organization is increased. They have to increase their non-informal networks more which will help in this endeavor. They should also see to it that they keep their clients non-redundant. For this to be possible, the employers themselves should analyze existing networks of its female professionals and facilitate more formal and informal networking with their male counterparts as well as clients. The authors admit that more study is required in this area. But they propose that increasing social capital (of female professionals) through networking and non-redundancy with their colleagues and clients will go a long way in bringing about equality in pay and promotion.
The factor of negotiation
Like any business deal, compensation and salary can also be negotiated. This is a common practice which is accepted both by employers and employees. If the current compensation policy is felt inadequate by an employee, he/she can negotiate with their bosses for better pay. There are many factors that will determine the outcome of such negotiations. The demand in the industry for a particular talent or qualification is the most important factor. Another factor would be the state of the industry itself or, to put it in other words, whether a particular industry is healthy or unhealthy. If the industry is healthy and booming, negotiation can have positive outcomes for the employees because of the surplus cash available with companies. The reverse will be true in case the industry or the economy is unhealthy. The negotiation factor is discussed here in some detail because a review of literature has revealed that men and women perform differently as negotiators under certain circumstances. This will have a direct bearing on the income-earning potential of the employee. A research report titled ‘When Gender Changes the Negotiation’ published by Harvard Business School states that even though there is no direct evidence as to the difference of negotiating abilities among the sexes, men perform better under certain conditions. “However, certain types of negotiation can set the stage for differences in outcomes negotiated by men and by women, particularly when:
- the opportunities and limits of the negotiation are unclear;
- situational cues in these ambiguous situations trigger different behaviors by men and women”. (Dina W. Pradel, Hannah Riley Bowles, and Kathleen L. McGinn, When Gender Changes the Negotiation, Research and Ideas, Working knowledge, Harvard Business School, 2006).
The authors say that such ambiguity occurs in job positions in what are known as high-ambiguity industries. The first point in the above quote indicates that the negotiation terms will not be clear. For example, the duties performed by the employee may not be easily quantifiable or when compensation standard for the job varies from one company to the other. Another example would be asking for a raise when the company itself or the economy is performing poorly. The paper also gives examples of high-ambiguity industries. They include telecommunications, real estate, health services, and media sectors. A study was conducted for this purpose involving MBA graduates. The paper also adds that in low-ambiguity industries, salary levels and negotiating outcomes were similar were more or less equal among both genders. The study found that men were able to negotiate a higher average salary to the extent of 10,000 dollars per annum. This is even when the job performance of both men and women were similar. The paper refers to another study which states that men and women increase their performance levels in order to increase their paychecks in situations where competition with colleagues is not a factor. But when performance is increased in order to outperform colleagues, men seem to be able to increase performance levels much better than women. Another interesting factor with regard to negotiation prowess is that women excel in this regard when acting on behalf of others. In other words, if women negotiate compensation on behalf of a colleague or subordinate, they perform as well as or even better than men.
There is more literature on this issue of negotiation. A book titled ‘Women Don’t Ask’ takes the stand that women do not even ask for a pay raise even if they feel entitled to it. An example of graduate students in Carnegie Mellon University was given. It was found that most of the male students got to teach courses on their own while a large majority of female students got to be only teaching assistants. The dean in charge of assigning jobs replied that men got the jobs because they specifically asked for it. A study was conducted about the starting salaries of students who had completed their graduation. It was found that males received on an average 4000 dollars more than females. The difference was due to the fact that 57 percent of males had negotiated for better compensation, whereas only 7 percent of females did so. It should be noted here that the females who negotiated for better compensation received roughly the same amount as male negotiators did. The point to be stressed is that it is due to non-negotiation that females receive a lower salary in many cases. To drive home the point between the attitudes of both men and women, an experiment was conducted at the University. Students (of both sexes) were asked to play a board game and would receive ten dollars on completion. They were only paid three dollars, and the balance was handed over only if they asked for it. Out of ten male students, nine asked for the balance to be pain while only one in ten females asked for the balance. A larger internet study involving several hundred people also concurs with this behavior. The participants in the study were asked the time when they had took part in the most recent negotiation (initiated by them and not by others). It was found that the average time for men was two weeks prior to the (internet study) while the figure for the women were one month. For the second most-recent negotiation, the figures were seven weeks and twenty four weeks for men and women respectively. (Introduction, Page 3, Linda Babcock, Sara Laschever, Women Don’t Ask – Negotiations and the Gender Divide, Princeton University Press). This indicates that men take part in a larger number of negotiations than men and can also include salary negotiations. This is despite the fact that women play multiple roles (that of employee, homemaker, mother, wife, caring for parents etc) and have to negotiate with others on a wider range of issues when compared to men. They need to negotiate constantly with doctors, nurses, care taking agencies, insurance companies etc. This level is increased in the case of divorced or single parents.
The book also states that the percentages of women who are members of trade unions have also reduced drastically. It is quite well established that unions have the power to negotiate many things including compensation on behalf of its members. The figure has fallen from 20 % in 1983 to just 13.5% in 2001. The book states that the scenario has not changed much even though attitudes about gender equality have changed for the better during the years. Moreover, organizations are also more open and less formal with lower levels of bureaucracy. This enables women to be more open and positive about negotiating for a pay rise.
It can be seen that negotiations play an important part in the amount of compensation a person gets. The studies have not shown any significant difference between the abilities of males and females, especially in the low-ambiguity sectors. The problem lies firstly on the reluctance of female employees to even ask for a raise. This trend is seen even at graduation levels. The second reason is that they lag behind their male counterparts when the terms and conditions of compensation to be negotiated become ambiguous. With regard to negotiation, it can be concluded that females will get better compensation than at present if they engage themselves more in the this process.
It has been clearly understood that women executives do not receive the same status with regard to pay (as well as many other factors). The issue was analyzed with respect to many theories, and it was found that the human capital theory, the social capital theory, and social bias were the most common ones discussed in literature about the issue. After studying several relevant studies, it was found that human capital theory holds good in this case. In other words, women and men executives do receive equal pay based upon their human capital. But it is to be noted that several variables were removed in order to arrive at such a conclusion. For example, women executives were not able to put in the same number of hours as men. They could not also develop professionally as men because of several constraints like their physical, social and family obligations. It was also found that women executives tend to have shorter careers when compared to males. Women executives, especially in the top management were found to be working in smaller organizations, probable due to the constraints mentioned above. This state of affairs existed in the case of executives in not for profit organizations also.
With regard to social capital theory, it was found that women can have the same level of capital if they put more effort into it. If they do so, they can also earn comparable salaries. The one concept that caused women to have lower salaries is social bias. This is mainly due to the fact that they are highly under represented at the executive level. The inability or hesitation of women to negotiate for salaries could also be a reason for this bias.
It can be concluded that there are genuine reasons why women executives earn considerably less than men. Many of these factors are beyond the power of the employers themselves. Even though there have been genuine cases of discrimination, if the above mentioned variables were removed, there is some level of equality in pay. But for it to be equal in terms of monetary value, more effort on the part of the women executives will have to take place. It is true that their constraints prevent them from applying themselves fully for this purpose. Unless those issues are addressed, the gender gap with regard to salary will remain for a long time to come.