November 27, 2018
Women Respond to Performance Pay Incentives Similarly to Men
When an employee is offered greater bonuses or a higher salary based on their individual performance, the company expects the employee to work harder to earn this kind of merit-based reward. Such performance pay policies have spread widely and estimates suggest that they account for much of the recent wage growth for top earners.
Women, however, have not seen the same levels of wage growth that men have. A possible explanation for this could be that women respond less to performance pay. Various studies have shown that women are less likely to engage in behaviors that may be associated with higher performance measures: They are more risk averse, less responsive to competition, and more altruistic than men. Whether women are less responsive to performance pay incentives is, however, an open question.
In a study titled “Do Women Respond Less to Performance Pay? Building Evidence From Multiple Experiments,” Erina Ytsma, Assistant Professor of Accounting, and co-authors sought to address this question. Ytsma worked with Oriana Bandiera and Greg Fischer of the London School of Economics and Political Science and Andrea Prat of Columbia University to compile data from 18 experimental studies on performance pay involving more than 9,000 subjects in diverse contexts. The researchers developed a Bayesian hierarchical model to estimate differences in the responsiveness to performance pay between genders, as well as the variability of responses across study contexts.
The study finds that women’s responsiveness to performance pay is similar to that of men, with very little variation across the various contexts reviewed. Furthermore, while the magnitude of the response to performance incentives varies considerably across contexts, these incentives increase performance on average, and the increase is large.
Thus, the gender earnings gap cannot be attributed to differences in responsiveness to performance incentives between men and women. “Possible alternative explanations for the earnings gap could lie in women avoiding jobs that offer performance pay for other reasons such as long work hours, relative underperformance in specific contexts like tournaments, or discrimination,” the researchers suggest. “More research is needed to study the extent to which these possible explanations hold true, and what policies may address them.”
Read more in the fall/winter 2018 Tepper Magazine.