Merit-based employment practices contribute to gender pay gap

Rather than reducing gender-based pay inequality by limiting managers’ reliance on factors such as gender bias and favoritism, a shift to performance bonuses and other meritocratic employment practices may actually widen the gap by preserving the status quo, according to some interesting new research.

In a longitudinal study of almost 400,000 employees from nearly 400 firms over 12 years, the gender gap in bonus pay was found to be greater in workplaces with a merit-based system than in workplaces without it, said the study’s lead researcher.

What the researchers say: “We’re all very familiar with the idea of merit pay at work, that workers get paid based on individual performance and not on other nonperformance-related factors,” she said. “But our paper shows that the opposite can be true, that merit-based pay can actually increase inequality. The findings are, in a sense, counterintuitive to the premise of a merit- or performance-based pay system.”

The researchers attempted to overcome the limitations of previous research on merit pay by analyzing data that spanned many organizations and provided historical compensation information about the employees who work there.

“One of the reasons why we don’t know that much about the impact of wage inequality is because data are pretty scarce,” she said. “It’s really hard to collect the kind of wage census data that reflects a shift to merit-based pay and the employee’s wage history. We need to have both levels of information to trace the changes in the impact and perform this massive-scale analysis.

“As part of a broader employment trend to increase productivity and fair treatment by adopting liberal-market practices, the firms we studied also changed from a seniority-based to a merit-based reward system.”

Using their data the researchers tested the impact of merit-based systems on three types of compensation: base wage, bonus pay and annual earnings. Findings from the analysis show that the gender bonus gap was higher at companies with merit-based systems, but there was no significant increase in the gender gap in total annual earnings, which includes all types of monetary compensation.

The researchers found that the more pronounced effect of the merit-based system on bonuses can be attributed to bonus compensation being more directly tied to individual merit and performance than base pay.

“Given the high level of gender inequality produced under the traditional employment system, many expected that the reforms pushing meritocracy would help decrease workplace gender inequality,” they added. “But we didn’t find strong evidence of an increase in the meritocratic distribution of rewards between men and women. Rather, we find that in most cases, rewards were distributed in a more, not less, biased way in workplaces that adopted a new merit-based reward system.

“What the reforms seem to have achieved is the preservation of the status quo—that is, a very large gender pay gap instead of the intended goal of increasing productivity by rewarding individual merit and performance.”

The research contributes to understanding gender inequality in times of shifting employment relations and the strong cultural belief in meritocracy across various aspects of society, including education and employment.

“Even as it’s become one of the dominant ideologies of our era, there are plenty of warning signs about meritocracy,” the researchers concluded. “Our study shows that the promises of meritocracy may be illusory and that a healthy skepticism of policies driven by meritocracy is warranted.”

So, what? The sad truth is that rewards based on meritocracy and the goal of equality are incompatible, and as long as we pursue them the inequality embedded in our societies will continue. We are genetically wired for equality—it’s in our DNA. Inequality increases stress and mental and physical illness.

Reward systems based on “merit” are, as the researchers point out, illusory. In fact, earlier research has shown that they often actually lower overall enterprise productivity and engagement in organizations that have tried them.

Read more research on the gender pay gap and inequality.