Stefania Albanesi: Research

 

Gender and Dynamic Agency: Theory and Evidence on the Compensation of Top Executives 

 

Stefania Albanesi, Columbia University, NBER and CEPR

Maria J. Prados, Columbia University

 

First version: April 2008. Currently under revision. Please e-mail me for more information.

 

Abstract

 

We uncover two new facts about gender differences in the structure of executive compensation. Female top executives receive a smaller fraction of total compensation in the form of incentive pay, especially in the form of stock options, and other forms of pay, such as long-term incentive payouts and severance payments. Earnings of female top executives display lower pay-performance sensitivity relative to their male counterparts, though the earnings of female top executives are more exposed to declined in firm value, while the earnings of male top executives are more exposed in gains in firm value, as well as gains in aggregate stock market performance. These findings are not accounted by the gender distribution by executive positions, attributes (such as age and tenure) or firm size. Moreover, they are not attributable to differences in performance between female- and male-headed firms.

To explore the determinants of these patterns, we first document the available evidence on gender differences in preferences (propensity to compete and to initiate negotiation, risk aversion), in behavioral traits (overconfidence), and in barriers to career advancement (lack of role models, exclusion from informal networks, gender based stereotyping, inhospitable corporate culture), from the experimental, psychological and personnel literature. We also examine gender differences in marital status and responsibilities for the care of children for workers in top managerial positions using the American Time Use Survey. We then incorporate these gender differences in a dynamic model of efficient executive compensation under moral hazard. We find that such a model is inconsistent with the observed pattern on gender differences in the structure of executive compensation. The gender differences in preferences, barriers to career advancement and home responsibilities imply that managerial effort is either more costly or less effective in raising firm performance for female executives. This makes it optimal for firms to increase the fraction of incentive pay and the pay performance sensitivity for female top executives, relative to males. We also consider the predictions of the “rent extraction view” of executive compensation (Bebchuk and Fried, 2003). According to this paradigm, boards are captive to the executives who set their own pay, subject to the threat of dismissal. In such a setting, executives that are more entrenched are able to extract larger pay. Their compensation will be awarded in the form of stock options or long term incentive payouts and severance, which are less visible to shareholders, and will tend to rise with aggregate market conditions. Since female executives and younger have lower tenure than their male counterparts, and they are excluded from informal networks, they are less entrenched, and thus the rent extraction view is consistent with the gender differences in the structure of executive pay. Our analysis suggests that the executive pay practices and the observed gender differences in the structure of pay are inefficient.

 

 

JEL Classification: J3, J33, J4, K0, M52

Keywords: Executive compensation; Incentive pay; Pay-performance sensitivity; Gender.

  

SLIDES 

 

Draft coming soon!

 

A previous version of this paper was co-authored with Claudia Olivetti and is available here.

 

Last updated: 12/12/2010.