It’s easy to presume that performance-related pay would be a good thing for inequality in the workplace as it limits the reliance of managers on things such as favoritism or gender bias, and focuses attention instead on meritocratic factors.
Alas, research from the University of Illinois Urbana-Champaign suggests that might not actually be the case. Indeed, such measures may actually make gender-based inequality even worse.
An equal footing
The researchers assessed around 400,000 employees from nearly 400 Japanese companies over a 12 year period to see what impact merit-based payments had on gender inequality. The analysis found that in workplaces with such a system, the gender gap was greater than in firms without it.
“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,” the researchers say. “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 used the data they collected in Japan to test the impact of merit-based systems on basic wages, bonus payments, and annual earnings. The findings reveal that the gender bonus gap was much higher at firms that use merit-based systems, but no significant differences appeared in total annual earnings.
“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,” the researchers say.
Merit pay
The researchers suggest that the findings illustrate a much bigger variation in the impact of merit-based systems on gender equality in the workplace than was perhaps previously thought, with different compensation types seeing a different level of impact on particular employee groups.
“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,” the researchers say. “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.”
Changing gender inequality
The results are interesting, not least because of the significant changes we’re currently seeing in employment relations together with the general belief in the power and fairness of meritocracy across society.
“Japan is a country whose work culture still has a pretty strong seniority payment system in place and is known for lifetime employment for employees—they get a job when they’re fresh out of college and stay with the same company for a long time, often until they retire,” the researchers say. “So it really helps us see what kind of changes that employees experienced during its transition from seniority-based pay to merit pay.”
The authors are confident that the phenomenon observed in Japan is also likely to be found in other countries around the world, and especially those with a long history of merit-based remuneration systems.
“Even as it’s become one of the dominant ideologies of our era, there are plenty of warning signs about meritocracy,” they conclude. “Our study shows that the promises of meritocracy may be illusory and that a healthy skepticism of policies driven by meritocracy is warranted.”
