As companies continue to strive to fill jobs with the best talent, their search often ends with hiring candidates sourced from outside of the company. A 5-year study of executives at US hi-tech manufacturing companies examined the role that the external labour market plays in gender pay differences. While female executives were found to have higher compensation than comparable men, the results indicate that women hired externally receive less than those hired internally, and as such may be disadvantaged by the external labour market.
Key Topics: Gender pay gap; External labour market; Executive compensation; Promotions; External recruitment
Title of Reviewed Article: The Effect of the External Labor Market on the Gender Pay Gap among Executives
Researchers: Cristina Quintana-Garcia (University of Malaga) and Marta M. Elvira (IESE).
Publication: ILR Review, 2017, Vol. 70 No. 1, pp. 132-159.
Setting the Scene
The representation of women in executive roles has received considerable research attention (e.g. Kalev, Dobbin, & Kelly, 2006), however, how they are compensated once they get there, relative to male peers, has received less attention. Research indicates that a gender pay gap exists at executive levels, consistent with gender pay gaps found at other levels in companies (Blau & Kahn, 2006; Elkinawy & Stater, 2011). How an executive level gender pay gap is impacted by employment practices is considered in the present study.
For various reasons, companies will often fill executive job vacancies with external candidates sourced through the external labor market (ELM) rather than promoting from within, which can have implications on decisions relating to how to appropriately compensate the successful candidate (Halaby, 1988). Typically, less information is known about external candidates, which can lead to more subjective assessment of their worth, which in turn can potentially leave more opportunity for differential treatment by gender (Bidwell, 2011). It is possible therefore that externally hired candidates may receive a compensation premium compared to those internally hired. As such, greater emphasis by companies on executive hiring via the ELM may result in higher compensation for men.
Following on from prior research which suggested that the gender pay gap is greater for variable compensation components (Elvira & Graham, 2002; Elkinawy & Stater, 2011), the researchers of this study further question if the greater emphasis on variable compensation at executive levels may facilitate gender biases given that their determination is often performance based and somewhat subjective (Petersen & Saporta, 2004).
To further examine this area, the researchers put forward the following hypotheses for examination:
Hypothesis 1 – “The compensation penalty for female executives relative to men recruited through the external labor market will be larger than that of internally promoted employees.”
Hypothesis 2 – “The penalty for female executives relative to men will be larger for variable than for fixed compensation, especially among employees recruited through the ELM.”
Hypothesis 3 – “The pay penalty for female executives will be reduced in firms with a higher proportion of women at the firm’s top levels, especially among employees recruited through the ELM.”
How the research was conducted
This study examined gender diversity and compensation information of 814 top executive positions in 105 U.S. public high-technology manufacturing companies during 2006 to 2011.
Company-level data was sourced from Thomson Reuters Datastream’s ASSET4 ESG database, including details on diversity management practices and the proportion of women in executive positions. Compensation information was drawn from the ExecuComp database and included salary and short- and long-term variable components. Biographical information on executives and company level factors such as performance data, was sourced from company proxy statements or Form 10-Ks.
For the purposes of the study, the researchers separated total compensation into ‘base salary’, which was not individual performance dependent, and ‘variable pay’, which includes performance related short- and long-term compensation components.
The researchers also accessed the method under which executives were hired into their job, through the ELM or internally.
A number of factors relating to human capital were examined, namely, job title, age, and company and job tenure.
Key Research Findings
8% of the 814 executives examined in this study were female. 29% of companies had at least one woman in their top management teams, while only four women were CEOs.
In total, 39% of female executives assessed were hired through the ELM versus 42% of male executives. The results indicated that this trend is shifting upwards however, with the respective percentage of external hires being 52% for females and 66% for males for those hired between 2006 and 2011.
Women in the sample were, on average, two years younger than men, and had two years less experience. While female executives were found to be more likely to work in large companies.
A number of factors were found to positively influence female executive compensation levels, including company size, company and job tenure, as well as a number of organizational practices, namely promotion of positive discrimination, work-life balance and training and development policies.
On average, women were found to have higher compensation than men with similar profiles, but this advantage was lessened if the woman was hired externally. As such Hypothesis 1 was supported, with the results indicating that female executives receive less total compensation when hired through the ELM rather than being promoted internally.
Hypothesis 2 was also supported, with the negative compensation effect for female executives hired through the ELM greater for variable compensation than base salary.
The results indicated that greater representation of women in executive positions has the effect of reducing the disadvantaging effect for women hired through the ELM, which supports Hypothesis 3.
Based on the results of this study, it appears that ELM recruitment has a negative impact on the total compensation of female executives, which is consistent with prior research suggesting that men benefit more from ELM career strategies (Dreher & Cox 2000; Lam & Dreher 2004), which is likely to be a result of the reduced skill and performance information companies typically have on externally hired candidates.
Conversely, when promoted internally, female executive see a premium in total compensation versus men. This advantage may be due to women being promoted quicker than men, and companies focusing more on internal gender pay issues than on gender pay issues created through external hiring (e.g. Gayle et al. 2012). Given that performance related information is available for employees is another reason why gender pay issues are less pronounced with companies’ internal labor market (Petersen & Saporta, 2004).
Interestingly, greater female presence in executive positions was found to positively influence compensation for new female executives hired by that company through the ELM, suggesting that they ‘pave the way’ for more equitable treatment of future hires, and facilitate greater compensation bargaining power for new female executives (Cohen & Broschak, 2013).
Organizational and Reward Implications
This study has a number of practical implications. For women, it would appear, a career strategy focused on upward mobility internally in companies may yield the greatest results from a compensation perspective, given the apparent disadvantage of the ELM to female executives.
The results should also provide food for thought for companies and managers when hiring from the ELM, as ELM recruitment can increase the opportunity for unconscious biases to creep in and potentially disadvantage women. Those in the ELM hiring process should ensure to implement robust hiring processes which facilitates as objective an analysis of candidates and their compensation as possible.
With growing interest in tackling gender pay issues, this study offers a timely reminder of some of the systematic factors that may facilitate creating gender pay inequality. The results of this study provide a good foundation on which future research should follow. It is possible that other factors relating to individual executives and companies play a role in creating pay inequality, such as negotiation approaches and ELM recruitment methods, and further analysis of these would yield useful further insight.
Source Article: Quintana-Garcia, C., & Elvira, M. M. (2017). The Effect of the External Labor Market on the Gender Pay Gap among Executives. ILR Review, 70(1), 132 – 159.
Published by: Sage Publishing
For further details and access to the full journal article Click Here (subscription or payment may be required).
Bidwell, M. J. (2011). Paying more to get less: Specific skills, incomplete information and the effects of external hiring versus internal mobility. Administrative Science Quarterly 56(3), 369–407.
Blau, F. D., & Kahn, L. M. (2006). The gender pay gap: Going, going...but not gone. In Francine D. Blau, Mary C. Brinton, and David B. Grusky (Eds.), The Declining Significance of Gender? pp. 37-66. New York: Russell Sage Foundation.
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Elvira, M. M., & Graham, M. E. (2002). Not just a formality: Pay system formalization and sex-related earnings effects. Organization Science 13(6), 601–617.
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Halaby, C. N. (1988). Action and information in the job mobility process: The search decision. American Sociological Review 53(1), 9–25.
Kalev, A., Dobbin, F., & Kelly, E. (2006). Best practices or best guesses? Assessing the efficacy of corporate affirmative action and diversity policies. American Sociological Review 71(4), 589–617.
Lam, S. S., & Dreher, G. F. (2004). Gender, extra-firm mobility, and compensation attainment in the United States and Hong Kong. Journal of Organizational Behavior 25(7), 791–805.
Petersen, T., & Saporta, I. (2004). The opportunity structure for discrimination. American Journal of Sociology 109(4), 852–901.
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