Why even top executive women aren't paid as well as men

Pay for performance - the concept that corporate executives earn gobs of stock grants when they perform well, but risk them if their company disappoints - should be a great leveler when it comes to executive pay. In theory, it creates a meritocracy. If the idea is to tie executives' pay to shareholders' results, then there should be no difference if the chief executive or chief financial officer is male or female.

But it doesn't quite work that way, according to a recent study by a researcher at the Federal Reserve Bank of New York and two academic colleagues. The researchers, whose study was published in March, said they found three new facts that show how much pay still differs for men and women on the job, even at the very top of the house.

For one, they found that female executives receive less incentive pay, or bonuses and stock options or grants, than their male peers. In fact, about 93 percent of the gap between their overall pay - the researchers found that the median woman in the study earned 14 percent less than her male peer - can be explained by the women's smaller incentive pay. "The key finding is that there are substantial differences in executive compensation" for men and women, Stefania Albanesi, an economist at the Federal Reserve Bank of New York, said in an interview. "And they're mostly driven by components that are not salary."

Because men tend to be awarded more equity, it makes sense that the study found that male executives benefit more when their firms go up in value. A $1 million increase in the company's stock market value, the study found, led to a $17,150 increase for the men in what the researchers call "firm-specific wealth," or the total accumulated value of the executive's stock options and stock grants. The women, meanwhile, received only a $1,670 increase when their companies' value rose by $1 million. Likewise, when the firm's value rose by 1 percent, male executives had their accumulated wealth rise by 44 percent, while women had only a 13 percent rise.

So if the pay-for-performance concept really works, then the inverse should be true: If the company's performance goes down, the male executive's wealth should be more exposed, too. But in Albanesi's study, it didn't work that way. She found that a 1 percent decline in firm value is linked with a 63 percent decline in firm-specific wealth for female executives. For the men, the decline was only 33 percent. "That's counterintuitive, because we usually think the executive has more skin in the game" with pay-for-performance schemes, Albanesi said. "It's a double difference, so to speak."

The study examined the pay of more than 40,000 top executives - chief executive officers, chief financial officers, vice chairmen, presidents and chief operating officers - between 1992 and 2005, the year before the Securities and Exchange Commission changed the rules for how pay data is reported. A little more than 1,300 of them, or just 3.2 percent, were women. The authors controlled for common reasoning behind the gender gap - tenure and title, age and industry - and still saw the differences. They also didn't see a link between the number of women in the top team and the overall performance of the company, busting the idea that women might just receive less incentive pay as a result of lesser performance.

So what does explain the differences? For one, Albanesi believes her study reveals these gender differences more than others have because she and her colleagues looked at the accumulated value of an executive's stock and option grants, rather than their year-by-year total pay package. Because so much of executives' pay comes in the form of equity, she said, and because many executives stay at this level for several years, "a lot of the differences in gender accumulate over time," making the top brass's accumulated holdings more telling than each year's total compensation.

In addition, Albanesi said, the differences lend support to an alternate economic view. It says executive compensation is not truly efficient, but is actually quite influenced by "entrenched" top executives, who are able to pressure the board - either through relationships or suggesting new directors - to limit their potential downside and open the floodgates on what they earn when things go well. This view would suggest that "because women have lower tenure, and don't have as many professional networks, they tend to have less power to set their pay than men," Albanesi said. "What we find between gender performance for men and women is consistent with that."

Addressing the problem shouldn't just be about upping women's negotiating skills. Nor should it necessarily be about female executives getting cozier with corporate boards, even as more and morewomen join them. And while better corporate governance in general could help in closing the gap, so could more transparency, Albanesi said. As equity is increasingly offered to professionals at lower levels of the organization, the gap in incentive pay between men and women has the potential to start even earlier in women's careers. "If there are distortions in the way incentive pay is set, and this becomes a bigger fraction of how people are paid ... it may exacerbate these gender differences," Albanesi said.

Still, Albanesi also recognizes that it's complicated, even if sharing more details about pay below the C-suite could help. "Most of us wouldn't want our compensation to be common knowledge, so there's a little bit of tension there," she said. "Having more information would certainly help ameliorate the problem, but that information is sensitive."