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Bias Creeps Into Bonus Process, MIT Study Finds

October 2, 2008
Related Topics: Compensation Design and Communication, Ethics, Performance Appraisals, Latest News

Employers generally believe they are being as fair as possible by rating employees’ performance annually and basing their bonuses on those ratings.

But a recent study by a professor at MIT’s Sloan School of Management shows that might not always be the case.

In the study “Gender, Race and Meritocracy in Organizational Careers,” professor Emilio Castilla found that despite being in the same job with the same supervisor and receiving the same performance ratings, white men often received higher bonuses than minorities.

The study, which examined 9,000 exempt and nonexempt nonmanagement employees at a U.S. company with a workforce of 20,000, compared white male and minority employees who were in the same job and work unit. They also had the same supervisor and experience and education levels.

Despite the similarities, the study found that Asian-American employees received bonuses that were 2.9 percent lower than those of their white male counterparts. African-Americans received bonuses that were 2.4 percent lower and women received bonuses that were 2.1 percent lower.

Non-U.S.-born employees received bonuses that were 5 percent lower than those of their U.S.-born white male counterparts, according to the study.

The irony in the findings is that the organization examined had training in place aimed at ensuring that managers were fair and diligent about how they set performance ratings, Castilla says. However, when the managers’ supervisors determined compensation based on those ratings, bias appears to have entered into the process, he says.

Castilla says other studies have shown that bias can seep into the determination of performance ratings. But even if there isn’t bias in that stage, this study shows that bias can affect employees’ career outcomes, he says.

“Companies have to be very careful when it comes to that second stage of linking performance evaluations to compensation,” Castilla says.

But compensation experts say that just because employers use performance ratings to determine pay raises, there could be other factors that would cause these discrepancies other than gender and race discrimination.

Often, if two employees get the same high performance rating but one
makes more in base pay than the other, the employee who started out with the smaller salary will get the bigger bonus, says Jason Kovac, compensation practice leader at WorldatWork.

“The lesson here is that companies should be able to document if there are differentials and be able to explain why they are there,” says Steve Gross, global leader of rewards consulting at Mercer.

“It’s OK to pay people differently if you can explain the variances. If you can’t, then you run the risk of someone feeling that they are being discriminated against.”

Another way to address these differentials is to have the same person conduct the performance evaluation and determine the bonus, experts say.

“Actually, it’s very atypical for an organization to have two people doing this,” says Ravin Jesuthasan, a managing principal at Towers Perrin. “As more organizations look to put more control into the hands of their line managers, these managers are having more accountability over pay decisions.”

—Jessica Marquez

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