by Cydney Posner

As reported on Sunday in this NYT column by Gretchen Morgenson, recent data shows that boards with more gender diversity pay higher compensation to their CEOs.  An Equilar analysis of CEO pay at 100 large companies “found that companies with greater gender diversity on their boards paid their chief executives about 15 percent more than the compensation dispensed by companies with less diverse boards. In dollars, this translated to approximately $2 million more in median pay last year among these companies.” While that doesn’t prove causation of course, as Morgenson explains, “[f]or some reason, I had expected women directors to stand tougher on pay issues.” 

SideBar: The presence of female directors is sometimes hailed as something of a magic bullet; there are numerous studies showing that women directors have a salutary impact on companies’ financial performance and governance matters. For example, a recent study from the Peterson Institute for International Economics demonstrated that the presence of women in corporate leadership positions (both on corporate boards and in executive positions) may improve firm performance and that “the magnitudes of the correlations are not small.”  (See this PubCo post.)  And Bloomberg has argued, while “[e]quality is a worthy goal on its own terms, of course….for the corporate world, the better rationale for gender diversity is financial…. Companies with at least one female director had better returns for six straight years.”  Moreover, according to Bloomberg, “there’s a pile of research showing that boards and other leadership panels with 50 percent women think more critically, which may explain the better results. Group dynamics change for the better when both sexes are present. Diverse groups solve problems better than homogeneous ones do, possibly because the men and women monitor each other’s performance more closely.”  (See this PubCo post.)

Among companies included in the survey, 57% have boards composed of more than 20% women (the average share of female directors among S&P 500 companies).  The study found that the “median pay among the chief executives overseeing the companies whose boards had more gender diversity was $15.7 million last year [as compared] with $13.6 million received by heads of companies whose boards had 20 percent or fewer women. Chief executive compensation at companies with more diverse boards also exceeded by 8 percent the $14.5 million median pay received by C.E.O.s employed at the top 100 companies.”

What could possibly explain this result?  According to one commentator cited in the column, “‘[i]t’s very difficult for women to get on boards, and I think they are under even more pressure to go along and get along…. The culture of the boardroom is to vote yes. You want to stay on the board, don’t you?’ ”  But another perspective voiced by Morgenson is that, while gender diversity may have increased by 31% over the last five years (according to Equilar), just being on the board may not be enough to “have a direct impact on a company’s pay practices. That is the domain of the compensation committee, the board group that oversees the methodology used to determine top executives’ pay. Women are not that common on these crucial committees. Even among the 10 most diverse boards, just under a third of the directors who are women — 14 of 46 — belong to compensation committees. Still less likely, the analysis showed, is that a woman will serve as chairwoman of a board’s compensation committee. Women performed that function at just two of the 10 most diverse boards last year.”  Nevertheless, data from those few examples is consistent with the headline: CEO pay at those companies did exceed the median. That sample may be too small and anecdotal to reach any real conclusions, but, until gender diversity becomes more common on comp committees, as Morgenson concludes, “those who had hoped women who are directors would rein in runaway executive pay” are likely to be disappointed by the results of this study.  But then, hey, maybe some CEOs will think that increasing the representation of women on boards is just the ticket!  (Just kidding, of course.)


Posted by Cydney Posner