There are numerous conceptions and theories about which factors drive executive compensation in businesses across the globe – and these are spurred by the ongoing gender pay gap debate. But which statements actually stand up to systematic analysis? hkp.com talked to hkp/// group compensation experts Jennifer S. Schulz and Verena Vandervelt.
Ms. Schulz, Ms. Vandervelt, What do you see as the key drivers of executive compensation? That’s to say, which factors have the greatest influence on compensation levels?
Jennifer S. Schulz: A single, all-encompassing answer to this doesn't exist as a number of interrelated factors are important in this regard. Job grading is the first driver for executive compensation on a worldwide scale. Job grades describe the specific requirements of a position, including the complexity of tasks involved and the level of impact on strategy / results. A position’s job family, for example Finance or HR, is also relevant for determining the compensation level. And of course, individual factors also play a significant role; take the age and gender of an executive, for instance.
... and the industryin question?
Verena Vandervelt: As you would expect, company-specific characteristics also impact compensation; particularly in relation to company size and industry, but also in terms of compensation philosophy and the strategic positioning of compensation in relation to the market.
How much weight does each of the outlined factors carry? Are there keydrivers that explain executive compensation worldwide?
Verena Vandervelt: Comprehensive and substantiated data are essential for a systematic analysis of the impact of these factors. Our respective analyses encompass compensation and company data from executives in 60 countries across the world. And these show that, although there are overarching global similarities in the importance of various influencing factors, there are also considerable differences in the weighting of individual compensation drivers at the regional level.
Jennifer S. Schulz: Our advanced econometric methods allow us to include various influencing factors simultaneously and to quantify with high precision the extent to which individual driver explains why some executives earn more than others.
Even the most sophisticated statistical methods can't explain all the differences in compensation. To what extent do differences remain unexplained?
Jennifer S. Schulz: Essentially, a handful of drivers explain the majority of differences in compensation. In Germany, for example, just over a tenth of compensation differences remain unexplained. These are either due to other influencing factors unavailable in our data set or to unsystematic influences such as randomness.
Let’s stay with Germany for a moment. What are the key factors influencing the level of executive compensation here?
Verena Vandervelt: Job grading is by far the most decisive driver and explains more than half of executive compensation differences.
Were you surprised by this result?
Verena Vandervelt: No, previous hkp/// group analyses have shown that the influence of job grading has risen steadily over the recent years. And this development indicates that evaluation systems for job grading are now being employed more systematically than was the case just a few years ago.
Jennifer S. Schulz: It's interesting to note that compensation differences in relation to different job families are significantly less of a factor than perhaps commonly assumed. A jobholder's being part of a job family such as Finance, HR or Marketing, only explains 6% of compensation differences.
Generally speaking, the size of a company and the industry in which it operates are deemed decisive for compensation levels. Does this picture need to be revised?
Jennifer S. Schulz: Our analyses clearly show that only around 3% of compensation differences can be explained by the size of a company. In line with this, positions with an identical grade in large and medium-sized companies are compensated at a comparable level. At 5%, the industry sector in which a company operates also accounts for a relatively small proportion of compensation differences in Germany.
Verena Vandervelt: Other specific factors in which companies differ from one another include compensation philosophy and strategy, corporate culture and location. These drivers account for a total of 9% of compensation differences and are therefore similar in weighting to the factors of company size and industry sector combined.
What about individual influencing factors, and gender in particular?
Jennifer S. Schulz: About 9% of compensation differences are ultimately determined by an executive's individual characteristics, with less than 1% being gender-related. But we need to be careful here as the fact that only a small proportion of compensation differences are explained by gender doesn't tell us anything about the actual size of the gender pay gap. In fact, when it comes to the gender pay gap, these results actually confirm how important it is to include other influencing factors in a gender pay gap analysis in order to look at the adjusted gap where the impact of gender is isolated.
Your analyses enable a global comparison of compensation drivers. What specific characteristics do you see in terms of the gender pay gap in Europe and the world?
Verena Vandervelt: I'd like to say from the outset that our analyses reveal some remarkable global similarities. Job characteristics in particular, and primarily job grading, clearly form the strongest category of compensation drivers. Further similarities relate to company size, which has a relatively small impact of up to 6% across all regions. However, in terms of the gender pay gap, there are indeed considerable regional or local variations. The impact of gender on compensation is at its greatest in Brazil, for example. Previous hkp/// group analyses have shown that the country also has one of the most pronounced gender gaps in the world.
Jennifer S. Schulz: China, on the other hand, presents a very different picture; individual characteristics such as age and gender do not appear to be decisive at all in terms of compensation levels. Compensation is determined without reference to the individual. On the contrary, the industry sector plays a relatively large role in China, which suggests that industries have a different reputation and compensate accordingly.
What about the impact of gender on compensation in Arab and American business worlds?
Verena Vandervelt: Surprising to many, gender doesn’t have an impact in Saudi Arabia. However, a closer look reveals an extreme disparity in the number of women in executive positions, which our data shows to be less than 1%. Therefore, differences in compensation between women and men are likely less about the level of pay itself than more about the opportunity to be in such positions in the first place.
Jennifer S. Schulz: Of all the countries included, the U.S. shows job grading as having the greatest impact. Gender, on the other hand, has no significant impact on compensation according to our analyses. Could it be that more than 50 years of U.S. political efforts against gender discriminatory compensation are finally producing results...?
Thank you for taking part in this interview.
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