Study finds minority and female directors earn less than peers

Diverse directors sit on boards at many big US firms, but often have fewer leadership opportunities 

Adam Yore

Adam Yore

Minority and female (or diverse) directors earn significantly more than non-diverse board members, according to an academic study. But there’s a catch: they do so because they are more likely to join the boards of larger, higher-profile firms that tend to pay more, at which point they earn less than their peers, the researchers say.

Matthew Souther, assistant professor of finance in the Robert J Trulaske, Sr College of Business at the University of Missouri, and co-authors Adam Yore, assistant professor of finance, and Laura Field, professor of finance at the University of Delaware, reviewed more than 1,800 companies and 70,000 board members and their compensation. Their paper – ‘Does diversity pay in the boardroom?’ – measures how well directors monitor the CEO, the vote totals directors receive to retain their seats on the boards, and each director’s qualifications, including education and professional experience.

While minorities and women are represented on the boards of many major US corporations, they often have fewer leadership opportunities within those organizations, and have an average 3 percent-9 percent gap in compensation with their peers. This is despite diverse directors having superior qualifications and receiving higher vote totals in director elections, the authors say.

The lower compensation is in part a result of board responsibilities. Although diverse directors are more likely to serve on certain committees – except the compensation committee – they are less likely to serve in key leadership positions associated with greater pay: committee chairs and directors who serve on important committees are typically paid additional money for their service.

The study results suggest diverse directors are 13 percent-29 percent less likely than non-diverse directors to serve as chairman of the board or lead director and 11.9 percent less likely to receive a committee chair position. The findings on committee chair positions are largely driven by female and minority board members being significantly less likely to serve as chair of either of the two ‘power committees’ – audit and compensation – the authors write. ‘Notably, while female directors are marginally more likely to be tapped as the governance committee chair, minority directors are significantly less likely to serve in any major leadership position on the board,’ they add.

Female and minority directors also earn less income beyond the formulaic components of director compensation, and female and minority representation on the director compensation committee and the existence of a board diversity policy attenuates this effect, the academics say. ‘While differences in responsibilities partially explain the pay gap, there is some evidence that indicates diverse directors earn lower pay for similar work,’ they write.

Having studied a group of directors who do not serve on the board’s standing committees, the academics find that the pay gaps empirically estimated become ‘stronger’. That is, diverse director pay is 9 percent lower among the set of directors whose only function on the board is that of an outside director. In addition, diverse directors are significantly less likely to participate in assignments that entitle them to the more discretionary ‘other’ compensation and earn 6.4 percent less than their peers in this category, according to the paper.

‘These results suggest that some of the pay gaps documented for diverse directors are the result of differences in opportunities to earn additional pay beyond the standard retainer,’ the authors write.

‘The pay gap is not huge, so we think this might be some type of subconscious effect,’ Yore says. ‘And yet it is something that could impact a board because it could be missing a significant perspective by not having a minority or female on the board serving in a leadership role. We also find that the pay gap is larger for those who have served longer, which is also concerning as boards always want to attract and retain the best people.’

The researchers suggest that to ensure equity, boards review how they appoint members to certain committees and leadership roles and ensure their appointment policies help provide a balanced perspective for their companies.

The study will be presented at the 2017 Annual Meeting of the Eastern Finance Association in April and the 2017 Financial Institutions, Regulation & Corporate Governance Conference, according to the authors.


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