Can Merit-Based Rewards Increase Gender and Race Bias?

Keys to pay fairness are formalization, accountability and transparency.

By Stephen Miller Sep 4, 2008
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Merit-based rewards and other common performance management practices now used by a majority of U.S. companies can actually increase bias and reduce equity in the workplace, says Prof. Emilio J. Castilla of MIT's Sloan School of Management.

Such practices and policies can result in women and minorities receiving less compensation than white men despite equal scores on their performance evaluations, Castilla's research found. But such "performance-reward bias” can be overcome by increasing accountability and transparency in the processes that connect performance evaluations and wage increase decisions, he advises.

"Already in 2005, it was estimated that close to 70 percent of organizations offered variable bonuses based on employee performance. Today even more companies rely on performance-related rewards,” Castilla observes.

"Perhaps these merit-based practices are intended to increase workers' job satisfaction and motivation to work hard, but to what extent are these practices working to solve workplace inequality?," he adds. "I found evidence of what I call 'performance reward bias' where even assuming that employers successfully find fair and unbiased ways of measuring employee merit during the performance evaluation stage, they can still potentially introduce bias and discretion in the way performance evaluations are used to determine employee compensation and promotions during the performance-reward stage.”

False Meritocracies

Castilla's article, "Gender, Race, and Meritocracy in Organizational Careers," recently published in the American Journal of Sociology, examines the relationship between performance evaluations and wage growth by drawing on personnel data from a large (and unnamed) U.S. service organization. The organization used a two-step process that separates performance evaluations from pay decisions. While the organization adopted a merit-based practice intended to ensure that rewards were allocated meritocratically, Castilla found evidence that this was not necessarily the case.

"The key finding was that women and minorities in the same job and work unit, with the same supervisor, and who had the same human capital received lower pay increases than white males, even when they were given the same performance evaluation scores,” he says, interrupting this as evidence of "performance reward bias." While women and minorities did not initially receive lower starting salaries or performance ratings than white men, Castilla says he found bias in the translation of performance ratings into amounts of salary over time.

Castilla contends that his findings point to a critical challenge faced by employers who adopt merit-based practices to fairly reward and motivate their employees. "Ironically, although these merit-reward policies create the appearance of meritocracy, this study shows that the less formalized, less transparent, and less accountable stages of the performance appraisal process can actually create a greater opportunity for … bias to emerge, negatively affecting the fair distribution of rewards among employees in a way that is more or less invisible to everyone in the organizational setting,” he wrote.

Subjectivism and Bias

Castilla believes that this bias can be introduced at two points in the performance appraisal process. These two entry points are:

  • When a head of a unit (or head of supervisors) recommends to HR a specific salary increase amount for an employee using the performance evaluations received from the evaluating managers. The head of a unit may request a lower salary raise for an equally performing minority employee than for a non-minority employee, resulting in a lower average for minorities in reward recommendations going to HR.
  • When HR makes the decision to approve or reject a given salary increase recommendation made by the head of the unit, as HR may reject more minority rewards than non-minority rewards.

Unmasking Unfairness

Because large organizations may be unaware of the unintended consequences of such merit-reward practices, increasing accountability and transparency in the performance-reward system will likely reduce bias, says Castilla. "We know from the social-psychological literature that accountability motivates decision makers to make fair decisions, which can help reduce judgmental biases,” he explains. Also, "the timing of accountability is crucial, because accountability appears to be much more effective in preventing rather than in reversing biases.” In the organization Castilla studied, unit heads were not accountable for their decisions regarding the amounts of salary increases.

Castilla also found that while greater transparency reduces the incidence of bias, there are several reasons why lower levels of transparency continue to exist. For example, year-to-year salary increases for individual employees are generally not observable to the rest of employees and administrators, eliminating any salary comparisons among employees and potentially masking unfairness.

Also, he notes that "because most yearly salary increases are quite low, salary disparities among employees are so small that they are not noticeable overall.”

Another factor: Because employees only tended to stay at the organization for just over two years, the shorter tenures minimized the long-term impact of the small differences in salary increases.

Stephen Miller is an online editor/manager for SHRM.

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