17 August 2020
Does disadvantage accompany black executives to the top of corporate America?
Paul Guest, Professor of Corporate Finance
Professor Paul Guest on his research and the case for reporting the ethnicity pay gap
The murder of George Floyd and subsequent global movement has focused attention on the unequal treatment of black citizens in American society and across the western world.
Inequality in employment is a pivotal part of this story. It is widely known that black workers are disadvantaged in the marketplace, earning less for a given job and less likely to be promoted than their white peers.
However, what we didn’t know until recently is how high up in the corporate world this disadvantage goes. We might assume that the exceptional human capital of black professionals who have overcome a lifetime of disadvantage would be recognised and rewarded at the highest levels. We might assume that racist attitudes would not survive in the executive suite and boardroom, and hope that at a certain level discrimination would disappear.
Every year, Fortune Magazine reminds us that there are hardly any Black CEOs. To address this scarcity we need to understand where and why the attrition occurs, so the problem can be addressed.
My research shows that even at the very top of corporate America, black executives are disadvantaged in terms of the outcomes they experience. On US boards, 53 per cent of Caucasian executives hold one of the top two positions (CEO or executive chair), compared to just 25 per cent of African American executives. Black executives face a 43 per cent lower probability of promotion, a 74 per cent greater probability of demotion, and a 55 per cent greater probability of exiting the executive ranks before retirement. These findings hold after controlling for executive characteristics such as position, age, company tenure, and education.
My research also finds that black executives earn lower compensation than Caucasian executives; nine per cent less in both cash compensation (salary and bonus) and total pay. These differences once again hold after controlling for executive characteristics. In dollar terms the difference in total pay translates to a substantial $374k difference annually.
These differences only occur for black executives, but not other ethnic minority executives. These differences are a specifically an issue for black executives, not an ethnic minority issue. The probability of promotion, demotion and exit for Asian and Hispanic executives are the same as for Caucasians. Asian executives earn comparable pay to Caucasian executives whilst Hispanics earn more. One could speculate that if these patterns are occurring at the very highest level within companies they are probably even worse at lower levels where companies are not required to disclose pay.
What causes these important differences between African American and Caucasian executives is not clear cut. Taken as a whole, the evidence suggests that African American executives are judged as underachieving. This could be due to either discrimination or to underperformance against a range of criteria. Discrimination or bias could take many forms. For example, corporate boards (which are predominantly Caucasian) may be unconsciously biased against African Americans and perceive them as lacking stereotypical leadership traits. It is also possible that the performance of African American executives is disadvantaged. Their social origins may mean that they have weaker executive networks, or do not have the tacit knowledge that can make progress easier in a predominantly white business world. They may be affected by the higher pressure to perform associated with being a minority, or by unspoken expectations that they devote time and energy to corporate diversity efforts.
My findings should be a concern for the largest US listed firms, who usually state a commitment to organizational diversity and should be worried about the message this sends to black colleagues rising through the ranks, as well as to those executives who have already been shown to have been rewarded unequally. In my view it is time that companies report a black pay gap in the same way that many UK companies are required to report a gender pay gap. This disclosure should include pay and mobility rates at all levels of seniority within a company. The negative publicity that is bound to result from this will be an important step towards ensuring that companies acknowledge the depth and complexity of the problem and start to address it.
Guest, Paul M. 2016. ‘Executive Mobility and Minority Status.’ Industrial Relations: A Journal of Economy and Society, Vol. 55(4), 604-631.
Guest, Paul M. 2017. ‘Executive Compensation and Ethnic Minority Status.’ Industrial Relations: A Journal of Economy and Society, Vol. 56(3), 427-458.