Output‐Based Performance Pay, Performance‐Support Bias, and the Racial Pay Gap within a Large Retail Stock Brokerage

• Author: Janice Fanning Madden,Alexander Vekker
• Published date: 01 October 2017
• Date: 01 October 2017
• DOI: http://doi.org/10.1111/irel.12191

Output-Based Performance Pay, Performance-

Support Bias, and the Racial Pay Gap within a

Large Retail Stock Brokerage*

JANICE FANNING MADDEN and ALEXANDER VEKKER

We measure sources of racial inequality in stockbroker pay. Pay differences arise

from sales differences. We measure the extent to which sales differences are due

to performance-support bias, whereby African American brokers receive weaker

firm supports, or to forces outside the firm, including client access, selection, and

consumer discrimination. Data on firm policies are matched to sales results. Data

on self-generation of accounts measure access to wealthy clients. Sales generated

from accounts with sales histories show racial differences in sales arising from

selection or consumer discrimination.

Introduction

Performance pay, wages, and salaries based on evaluations or direct obser-

vations of individual worker productivity has steadily replaced seniority-based

pay systems over the last several decades (Cappelli 1999), although there is

recent evidence of a plateau or even decrease since 2001 (Gittleman and Pierce

2013). Lazear (2000) and Barth et al. (2009) showed that such pay policies

increase wage dispersion within firms and Lemieux, MacLeod, and Parent

(2009) showed that performance pay increases wage inequality economy-wide,

although Gittleman and Pierce (2015) found a more modest contribution from

performance pay. Recently, researchers’attention has shifted to the effects of

performance pay on racial wage inequality. Performance pay could either

increase or decrease the racial pay gap within firms. On the one hand, perfor-

mance pay is expected to reduce the effects of managers’social or psychologi-

cal biases on their decisions, leading some scholars (i.e., Stainback,

Tomaskovic-Devey, and Skaggs 2010; Joshi, Liao, and Jackson 2006) to

hypothesize that more formalized personnel practices should be associated with

less racial inequality. Fang and Heywood (2006) showed that non-Europeans

*The authors’affiliation is University of Pennsylvania, Philadelphia, Pennsylvania. E-mail: madden@

upenn.edu;avekker@sas.upenn.edu.

INDUSTRIAL RELATIONS, Vol. 56, No. 4 (October 2017). ©2017 Regents of the University of California

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in Canada are paid the same as Europeans when paid according to their out-

put, but less when paid on a time rate. Similarly, Green, Heywood, and

Theodoropoulos (2014) found that, after controlling for selection, the ethnic

earnings gap in Britain is smaller for jobs paid by performance than for those

paid on a time rate. On the other hand, because performance pay increases

wage variance, it could potentially also lead to larger wage gaps by race (Blau

and Kahn 1997). Also, biases may appear at other stages of the pay decision,

so that racial inequality is not decreased by the use of performance pay (Cas-

tilla 2008).

Stainback, Tomaskovic-Devey, and Skaggs (2010), among others, cautioned

that the effects of performance pay on race differentials also depend on con-

text. Performance pay may be based on a manager’s evaluation of performance

or on direct observations of output produced. If performance pay is based on

performance evaluations, racial compensation disparities arise if performance

evaluations differ by race or the relationship of performance evaluation to

compensation differs by race (Castilla 2008). If performance pay is based on

counts of output, such as piece rates in manufacturing or sales commissions,

the effects on racial wage disparity may differ from performance pay based on

performance evaluations. When pay is based on counts of product produced or

sold and those counts are not modified either by managers’judgments of qual-

ity of product or by managers’assignments of venue or complementary perfor-

mance supports (such as sales area designations or particular machines or

tools), then managers’biases are unlikely to affect output, or the resulting out-

put-based pay. Racial disparities in output-based pay, however, may arise in

the context of biased evaluations of quality of product or assignments of

venues and complementary inputs.

Empirical studies have produced varied results on the relationship between

racial differentials and performance pay. In an early study, Belman and Hey-

wood (1988) found smaller race pay gaps in industries with more performance

pay. Empirical studies of performance pay based on evaluations (the most

common form of performance pay) find racial pay disparities both because per-

formance evaluations differ by race and because the pay of African American

employees does not increase as much with positive performance evaluations.

Studies generally find members of minority groups receive poorer performance

evaluations (Castilla 2012; Elvira and Town 2001; Lewis 1997; Mount et al.

1997). Research also finds that members of minority groups are affected by

other management decisions that sustain inequality in pay, even in the pres-

ence of racially equivalent performance reviews. Castilla (2008) found that

positive evaluations have subsequently greater compensation payoffs for non-

minority workers, a phenomenon that he labels performance-reward bias. Cas-

tilla (2008) concluded that formalization of performance-management systems

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