In many countries, gender diversity in the workplace is a hot topic and the role of women on corporate boards and compensation committees has come under scrutiny from regulators and legislators. A recent study of US companies examined the effect of compensation committee gender diversity on CEO compensation. Unsurprisingly, women were found to be underrepresented on compensation committees, however of the female members that there were, they were found to be younger and less experienced that their male counterparts. Additionally, greater gender diversity on compensation committees was not found to significantly influence the determination of CEO compensation.
Key Topics: Compensation committee; Gender diversity; Executive compensation; CEO compensation
Title of Reviewed Article: Gender Diversity in Compensation Committees
Researchers: Sascha Strobl (University of Vaasa), Dasaratha V. Rama (Florida International University), and Suchismita Mishra (Florida International University).
Publication: Journal of Accounting, Auditing & Finance, 2016, Vol. 31 No. 4, pp. 415-427.
Setting the Scene
Empirically and anecdotally the underrepresentation of women at senior corporate levels is a clear and global phenomenon (Friedberg & Webb, 2005), which has led to regulatory changes in many countries to address this imbalance. In 2003, Norway was one of the first countries to introduce mandatory quotas for female directors, and since that time many other countries have acted similarly. Since 2009, in the US, companies are required by the SEC to disclose diversity of candidates for director nominations.
In justifying more board diversity (Prowse & Li, 2014), the SEC cited a study by CalPERS which indicated that diverse boards create greater shareholder value. This assertion however is far from consistent with other research which has shown no (or a negative) relationship between board diversity and company performance (Johnson & Butrica, 2012; Neumark & Song, 2013).
Theoretically, gender diversity can be positive for companies, allowing for alternative viewpoints, creating greater strategic control (Rothstein, 2011), as well as increasing external legitimacy and making the company potentially more attractive to prospective employees (Johnson & Mommaerts, 2010). However, there is also the potential for negative effects, through increased conflict, reduced trust, and poorer communication (Gustman & Steinmeier, 2001). There is also the associated issue of a small number of highly sought after women having multiple corporate positions with different companies (Gustman & Steinmeier, 2001).
While there have been a number of studies on board gender diversity, limited research exists in relation to gender diversity on compensation committees, a committee that is central to the determination of executive pay in many companies. The performance of compensation committees has come under increased scrutiny in recent years, with common criticism relating to top executives being overpaid due to ineffective compensation committees. As with board diversity and company performance, if a link between compensation committee gender diversity and compensation committee performance can be found, then there is a business case for such diversity, and if not a case needs to be found on different grounds.
This study proposed one primary hypothesis, which was – “Companies that have gender-diverse compensation committees will be less likely to have excessive executive pay.”
How the research was conducted
Data from The Corporate Library’s US directorship database from 2006-2008 was examined, which included 5,630 firm-years. Financial and stock price data was taken from the Compustat and CRSP databases.
Using this data, the researchers developed a model to examine the factors associated with female presence on compensation committees. Additionally, a model was developed to examine the relationship between executive compensation levels and gender-diverse compensation committees.
Key Research Findings
34% of the companies reviewed were found to have at least one female director on the compensation committee, while 11% of all compensation committee directors were women.
On average, female directors on compensation committees were found to be younger than their male counterparts (60.1yrs vs 61.6yrs) and to have shorter tenure as directors (8.0yrs vs 8.5yrs), as well as being more likely to be an outside director.
The results indicate that various factors increase the likelihood of female presence on compensation committees, with the likelihood increasing when the company 1) is bigger 2) has more outside board members 3) has more directors on the board 4) has a bigger compensation committee 5) has worse long term performance 6) is stock exchange listed.
Gender diversity on compensation committees was not found to have a significant bearing on CEO pay determination.
This study confirms the expected result that women are still significantly underrepresented on compensation committees, although the results offer some encouragement that this may be changing. Recent actions by legislators and regulators related to the composition of public company compensation committees appear to be having affect, with concessions for less experience seemingly being made when appointing women to compensation committees, which is likely to reflect the reduced pool of potential female candidates for these roles.
While an underrepresentation of female directors was found, of the female directors that were captured in this study, they were found to be as likely as their male counterparts to be on the compensation committees, suggesting that where appropriate female candidates are available companies are taking a gender-neutral stance in compensation committee appointments.
Interestingly, female representation on compensation committee does not appear to influence the determination of CEO compensation levels, suggesting that the approach of female compensation committee members is to maintain the status quo.
Organizational and Reward Implications
The issues highlighted in this study regarding limited pools of female candidates for compensation committee roles is something that will ring true for many companies. However, what the results of this study suggest is that when women are appointed their input leads to much the same outcomes for CEO compensation. While this could be viewed as women not having influence over the committee, it could also be viewed as them having as much influence as male counterpart, and further suggests that when a robust process is followed in determine CEO compensation, the outcome is gender neutral.
This study provides valuable insight into gender diversity in compensation committees and the role it plays in determining CEO compensation. While this study focuses on the output of compensation committees, it would be interesting to see future studies examine the process through which decisions on CEO compensation are made, and the role of both male and female committee members in that process, in order to better understand to role of gender in compensation committee outcomes.
Source Article: Gender Diversity in Compensation Committees. Strobl, S., Rama, D. V., & Mishra, S. (2016). Journal of Accounting, Auditing & Finance, 31(4), 415-427.
Published by: Sage Publications Inc.
For further details and access to the full journal article Click Here (subscription or payment may be required).
Friedberg, L., & Webb, A. (2005). Retirement and the evolution of pension structure. Journal of Human Resources, 40(2), 281–308.
Gustman, A. L., & Steinmeier, T. L. (2001). Retirement and wealth. Social Security Bulletin, 64(2), 66–91.
Johnson, R. W., & Butrica, B. A. (2012). Age disparities in unemployment and reemployment during the Great Recession and recovery. Unemployment and Recovery Project Brief 3. Washington, DC: Urban Institute.
Johnson, R. W., & Mommaerts, C. (2010). Social Security retirement benefit awards hit all-time high in 2009. Fact Sheet on Retirement Policy. Washington, DC: Urban Institute.
Neumark, D., & Song, J. (2013). Do stronger age discrimination laws make Social Security reforms more effective? Journal of Public Economics, 108, 1–16.
Prowse, V., & Li, Y. (2014). The insurance role of household labor supply for older workers. Michigan Retirement Research Center Research Paper No. 2014-309: Cornell University.
Rothstein, J. (2011). Unemployment Insurance and job search in the Great Recession. Brookings Papers on Economic Activity, Fall, 143–213.
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