Chapter 9
THE MYTH OF MERITOCRACY
Gender and Performance-Based Pay
As chapter 8 revealed, some women succeeded on Wall Street despite the subtle discrimination and prevalent workaholism. Some might think that the existence of successful women supports the notion of a Wall Street meritocracy and therefore that less successful women deserved lower pay because they made personal choices that derailed their careers. But merit alone cannot explain the differences in men’s and women’s career trajectories.
The fact remains that women who were equal to their male counterparts as a group made less money. This is even more surprising given that Wall Street firms compete for the most talented individuals; this is, after all, the path to making the most money for both the firm and the client. The long bull market of the 1990s should have created more opportunity regardless of biases. With business booming, Wall Street firms should have tried to retain anyone who could skillfully manage the volume of work and contribute to their huge bottom lines, leading them to be gender blind. The performance-based pay system should have, theoretically, created equity by compensating workers on their worth rather than according to characteristics like gender. But men and women encountered different environments in this industry, and the bonus system encouraged unequal results independent of skill, effort, or other aspects of merit. The result is a larger-than-average gender gap in pay.
Gender and Career Trajectories
As the rest of Selling Women Short has demonstrated, gender shapes Wall Street careers right from the start. At the entry level, Wall Street firms made efforts to hire women, but women applied in smaller numbers than men. Women represented only 20 percent of incoming associates. Women also started in different areas of the securities industry, either because of their own preferences or because managers hired workers who resembled them or their clients. As a result, hiring practices had a disparate impact on women, who tended to be tokens and who were especially isolated in the highest-paying jobs, which had the highest proportion of men. As tokens, women were highly visible and vulnerable to performance pressures, stereotyping, and discrimination. They had to fight cultural assumptions that they were less competent than their male peers. Because of these assumptions, many of women’s contributions to the productivity of their work groups were overlooked or devalued by their managers and colleagues, especially if indicators of performance were not clear-cut. Managers’ and coworkers’ preferences for coworkers similar to themselves gave further advantages to those in the majority. In most areas, these preferences favored men.
The processes that obstructed women’s early careers meant that very few women made it into the senior ranks, and those who did had to overcome contradictory standards—those that applied to them as workers and those that applied to them as women. As one informant commented, most women who made it in finance had a “Stepford wife” quality to them; they were not necessarily strong role models or advocates for women in the junior ranks.1 As a result, there were few real role models for new female hires, especially in the higher-paying areas. And the few pockets where there was greater diversity were usually job ghettos with lower pay.
Another significant barrier to many women’s success was the intense time commitment that Wall Street required. This generated a culture of workaholism that precluded involvement in family life and defined the ideal worker as one with no extra-work responsibilities and preferably with a stay-at-home spouse. This definition of the ideal worker was based on the average life shared by the male majority and contradicted women’s typical family situation, posing additional obstacles for women who did not want to, or could not, emulate male patterns.
Approximately one quarter of the women managed to succeed despite these obstacles. But women had a higher rate of attrition than men in the early part of their careers, were promoted at a lower rate, and often moved into lower-paying positions where there were more women. Given that fewer women continued to pursue their careers and were at higher levels, and those who remained continued to encounter obstacles to success, gender inequality on Wall Street probably worsened as their careers progressed further.
Markets and Meritocracy
Those who believe in the justice of competitive markets might argue that this type of inequality must be justified, otherwise firms that permit subtle discrimination would be at a disadvantage compared to those that do not.2 That is, they would argue that discrimination must make firms more competitive or they would fail. But securities firms do not necessarily pay a high economic price for offering privileges to white men. They can distribute workers across work groups, or work within groups, in a variety of ways without changing the firm’s profits. In some cases managers appeared to believe that distributing fewer good accounts to women was economically rational because they expected clients to prefer men or believed that investments in women’s careers were a waste of resources because they would eventually leave the labor force. Firms also had substantial leeway when they allocated bonuses. Bonuses provided incentives for future performance, but pay that did not exactly match performance might have little impact on workers’ motivation or subsequent performance, especially if performance was hard to measure and the fair bonus amount was unknown. Most of the influences on gender differences in access to accounts and performance evaluations were also subtle enough to be unconscious. Meanwhile, the ideology of market efficiency was used to justify inequalities that are incorporated into and perpetuated by the bonus system, defining them as meritocratic.3
A meritocracy is a system in which advancement is based on individual ability or achievement. While many touted Wall Street’s compensation system as meritocratic, Selling Women Short shows how it is instead a self-reproducing system of structural inequality. Remember that the men and women I interviewed were similar, and yet a large gender gap remained after accounting for other influences. Wall Street’s bonus system permits nonmerit influences to affect pay decisions, many of which have a disparate impact on women. While firm revenues and group revenues affected men and women alike, women were disproportionately funneled into groups with lower revenue potential. Perceptions of performance within teams of workers adversely affected women because of universal tendencies to prefer similar others and to view men as more competent than women. The lack of fit between Wall Street’s workaholic culture and typical family arrangements had negative effects not only on women’s performance but on how they were perceived and thus on evaluations of their performance, even in the face of contradictory information. Thus ends the myth of meritocracy.
If this kind of subtle discrimination can persist on Wall Street, which is supposedly driven only by money, then it’s likely that similar processes operate in other settings with performance-based rewards. This isn’t a “blame me first” polemic, rather the bonus system itself reproduces inequality by concealing information about criteria for determining bonus amounts and about others’ pay and by holding women to higher standards than men. Recognizing this, 29 percent of the workers I interviewed viewed meritocracy on Wall Street as a myth.
Some of these workers disavowed meritocracy on Wall Street because bonuses seemed arbitrary. Large pay differences within work groups and disconnections between performance and pay made bonus amounts seem random. Vicki, who left Wall Street to work at a commercial bank, compared the pay at her current job with that of her first job in equity research.
Working at [the Wall Street firm where I was an analyst], there were some people there who were making huge amounts of money, and there was a very large discrepancy between the highest-paid analyst and the lowest-paid analyst. One of the things that is just very obvious is that the pay scale where I am now is much more compressed. There is not nearly the same differentiation in compensation between people of a similar rank. That is just a lot better to be around. You’re not making fifty thousand dollars, while somebody down the hall from you doesn’t seem to be working as hard as you but is making five million.
From her perspective, pay on Wall Street did not correspond to effort or productivity. The lack of evidence that differences were merit based led her to view the bonus system as arbitrary and unfair.
For some workers, subjective evaluations even contradicted more objective measures of performance, leading to especially strong rejections of the myth of meritocracy. Tracy, the trader who left the industry after her flexible work arrangement led to a poor bonus, remarked,
It’s very subjective whereas you think in trading, “Okay, you made your P&L and you get X.” But it’s not. . . . The team review process, while it sounds good on paper, is difficult because it is very subjective and anyone can write a review on you. So if somebody doesn’t like you because your trade affected them in some way . . . they can write a scathing review, unsolicited, on you and that can show up on your [evaluation form] or your comprehensive review that your manager puts together and suddenly you’re faced with, “I don’t like her because she wears really loud pink shoes.” . . . Is it fair? I don’t know. Because you can make your P&L and do your job and go to work every day but if you don’t kiss everyone’s butt or be everyone’s little favorite you’re not going to get your team review to be stellar.
Because she had profit and loss indicators to gauge whether or not her bonus accurately corresponded to her performance, she was particularly disturbed by subjective influences on her evaluations. When evaluations contradicted tangible evidence of performance, workers viewed meritocracy on Wall Street as a myth.
Women were much more likely than men to disbelieve the myth of meritocracy because, as this book has illustrated, women were more subject to nonmerit influences having a negative impact on their bonuses. Forty-three percent of women, compared to 9 percent of men, rejected the myth of meritocracy. Could Wall Street be a true meritocracy despite this? Theories and research on women’s experiences in the workplace suggest that it is unlikely.
Theories about Stratification and Meritocracy
As chapters 4 and 5 discussed, theories in social psychology imply that a true meritocracy in a setting like Wall Street is improbable because of nearly universal preferences for others who resemble oneself and cultural tendencies to view men as more competent than women, even when men’s performance is equal to or worse than that of women. Because men are the incumbents of Wall Street and have more status in general, women are at a disadvantage—it’s as simple as that. This is common to many, if not most, occupations, but my findings reveal how they perpetuate gender inequalities in a performance-based system. When evaluations of performance are partly subjective, they will inevitably be swayed by attraction to and beliefs about others. Men’s preference for other men and a cultural gender hierarchy that awards men higher status than women led to higher evaluations for men. In fact, most people, both male and female, unconsciously hold biases that favor men in this setting. That fact, coupled with the trend toward subjective performance reviews more generally, bodes ill for meritocracy anywhere.
Gender theories also predict that men will receive advantages on Wall Street even when their performance is identical to that of women because the industry is male dominated. Being in the minority can have detrimental effects beyond those created by the majority’s attraction to similar others, as Kanter has pointed out.4 Women’s increased visibility as tokens forced them into stereotyped roles, heightening performance pressure on them and demanding that they represent all women while also meeting standards set by the male majority—a tall order for anyone. Even the most successful women, who sometimes believed that standing out from their peers had helped them, noted that they were held to different standards as women. For example, Julie noted,
I actually think that being a woman has been an advantage. And I would be surprised if most of the women at my level didn’t say that. I think that Wall Street desperately wants to hire and retain qualified women. And I think that if you are good, the senior management at these firms, especially the senior management at my last firm, they know who every single woman is at the VP level. They don’t know every guy. To be able to get in the elevator and have them talk to me is an advantage. But if you are not performing well then it is probably going to hit you harder. I think that a weak woman stands out more than a weak man.
As this suggests, women who were exceptional could receive an advantage from their higher visibility, but mediocre men could pass through the ranks more easily than mediocre women. This type of double standard permeated the securities industry and prevented it from producing a true meritocracy.
Thirty-two percent of the women observed that women’s performance was subject to different standards than men’s, which affected their evaluations. Jacqueline, a research analyst, said that men held women to higher standards in their reviews.
[The head of the group] who still runs research at [my first firm] probably had this deep-rooted belief that women belonged at home. And I think you could prove that women were not compensated at the same level men were for doing equal work. . . . We all had our year-end reviews and you get reviewed from all different constituencies. And there was one woman who was a great analyst. You couldn’t possibly find fault with anything she did and she goes in there and he has something to say about her performance whereas the guys go in there and there’s no big deal. Nothing. So I think he probably demonstrated some bias toward men in the performance reviews.
From her perspective, meritocracy must be a myth because subtle gender biases influenced the reviews on which compensation was based, leading to greater scrutiny of women with impeccable performance than of average-performing men.
Theories about gender and skill also suggest similar biases against women in performance evaluations because skill is an ideological category that is defined by the typical characteristics of workers who perform a particular task.5 In other words, definitions of skill in a male-dominated setting like Wall Street are biased toward expertise and characteristics that are typically held by men, while those that most women possess are devalued—even if they might be readily applicable to the situation at hand. When pay is based on performance evaluations, cultural and job-specific definitions of skill and performance lead to systematic inequality rather than meritocracy. Illustrating this, Maureen said that performance evaluations rewarded men for stereotypical male behavior and devalued qualities more typical among women even if they improved performance.
This woman is 5′10”, played field hockey and lacrosse. She’s not thin, she’s not fat but she’s not—she went to Harvard. She’s not shy and timid. She can be really aggressive. She holds it back. She was told, like apparently every other analyst woman in her class, that she was very timid. She was like, “Oh my God! I’ve never in my life been called timid.” I don’t think she’s timid. I think she has a manner about her which isn’t—she doesn’t shoot from the hip and make stuff up when she goes to a meeting, and she definitely kind of has a different style but women’s style is categorized as “timid.” . . . And guys who mouth off when they don’t know what they’re talking about, I find in the end, have been typically rewarded as opposed to being penalized and they . . . do huge damage.
In her view, men were rewarded for behaviors that negatively affected their performance, while women were penalized despite better performance. She added, “You’re not out there beating your chest and doing this stuff, and you’re not out there making non-credible threats, and so you get paid less because you’re ‘timid.’ ” From her point of view, compensation discrimination occurred partly because the value of women’s contributions was not perceived, while stereotypically male behavior was idealized.
Along the same lines, Fletcher found that women engineering executives had relational skills that added value in the workplace but that remained invisible to their managers and colleagues—largely because they are acquired through gender socialization.6 Similarly, Gutek’s theory of sex-role spillover argued that as occupations become gender typed, the gender role becomes part of the work role.7 Work in female-dominated jobs is then structured to take advantage of women’s stereotyped traits while not rewarding them as skills, and male-dominated jobs incorporate men’s stereotyped traits and define them as essential for performance—even when they actually detract from it, as Maureen observed. On Wall Street, the skills that were rewarded were those that fit with stereotypical masculinity, while women’s contributions were discounted.
Accordingly, one-third of the women believed that the bonus system perpetuated gender inequality by holding women to different and higher standards and by not rewarding them for attributes that contributed to their productivity. These women rejected the idea that Wall Street was a free market paradise, and their observations exposed the effects of entrenched cultural biases on the performance review system. But the “myth of meritocracy” still provides a potent interpretation of bonus pay for workers across pay levels. If you didn’t get a good bonus, so the thinking goes, then you must just not be that good: it’s not the system, it’s you. Over two-thirds (71 percent) of Wall Street workers believed that the compensation system was a meritocracy, sometimes despite experiences that clearly contradicted the myth. They believed in it because they were high earners, they did not know how much others were paid, they compared their earnings only to others in the exact same job, and/or they had clear measures of performance that corresponded to their pay. In fact, a belief in meritocracy persisted, even among many workers at the bottom of the ladder.
A majority of Wall Street workers believed that the securities industry distributed pay fairly according to workers’ merits. This is exactly what Wall Street firms have asserted when faced with sex discrimination cases, and none of these firms has accepted culpability in these cases even though they paid out large settlements. Many of those who rejected the myth of meritocracy responded by changing firms or leaving the industry rather than challenging its legitimacy. Thirty percent of the women, or 69 percent of those who challenged the myth of meritocracy, left Wall Street or sought a position at a different firm, and all of the men who regarded meritocracy as a myth did the same. Leaving their jobs after a disappointing bonus might have resolved their individual sense of injustice, but the system retained its legitimacy. In fact, the system maintained its legitimacy partly through the self-selection of dissenters out of the industry. The only ones left are those who closely hold to the myth and see it reinforced. At the end of the day, challenges to the myth of meritocracy produced higher attrition, but they did not destabilize Wall Street’s claims to be a meritocracy. Yet, as this book has illustrated, the idea that the bonus system produces a meritocracy is false, since nonmerit influences affect the distribution of work, the evaluation of performance, and the allocation of pay.
Strategies and Solutions
Given the existence of systematic gender differences, what might have improved women’s opportunities on Wall Street, leveling the playing field and making it better not only for the women but for the firms themselves? First, Wall Street firms could stop pretending that market forces lead to fair and unbiased outcomes. They don’t. A variety of subtle social forces reinforce structural discrimination within the market. Continued fetishization of competitive markets, on Wall Street and in American society more generally, will perpetuate the kinds of subtle discrimination that I have uncovered in the securities industry.8 But recognizing inherent cultural biases and how they operate in this setting and most others might encourage firms to raise their awareness of these biases to a conscious level, prompting managers and workers to take a second look at women’s performance when they evaluate them. Senior managers could also make special efforts to scrutinize evaluations of men and women with widely different pay in the same job to determine whether gender bias entered into their relative bonus decisions. This could also make managers sit down and think about what skills are really in play in any given job and to evaluate how teams work together.
The most successful women also offered important lessons. One of their most fruitful strategies was to work in an area where performance was easier to measure, like quantitative underwriting products or sales and trading. Of course, truly objective performance criteria do not and cannot exist for some jobs, but there were areas where performance measures were clearer. Even in these areas, though, men were more likely to find mentors and account allocation was not always equitable, but Wall Street firms could work to establish more tangible criteria for performance in all areas. They could especially improve opportunities for women if they could develop more accurate measures of performance in investment banking and tie bonuses to those measures rather than relying on manager and coworker impressions. One strategy for doing this would be to tie bankers’ pay more closely to the deals that they work on, paying them a fixed percentage, based on their rank, of the fees for the deals that they worked on. The remaining problem would be to develop more even-handed criteria for allocating work, which could be solved by developing an algorithm for allocating deals and accounts evenly across workers. These firms develop mathematical models for all sorts of other things, so why not for dividing work evenly across workers? This would produce greater equality in opportunities to perform. By doing this, women would not be passed over for the best accounts, and their contributions to the team could not be overlooked or discounted. These procedures would probably also benefit other disadvantaged workers like nonwhites and Hispanics.
But let me be clear that I am not suggesting that these firms need to spend more time or resources on performance reviews, which seem to already be out of hand. Tracy, who worked in trading, commented,
[My firm] likes to pride itself on its touchy-feely peer evaluations and managerial evaluations that began in September or August in which case you had to solicit reviews from five to seven peers and then write reviews on your desk, your group, as well as anyone who asks you to write one on them. And it’s something that from your standpoint as a nonmanagerial standpoint, takes a lot of time and there are deadlines. . . . And then it’s a colossal time waste and from a managerial standpoint, they are just swimming in all this crap. They get three-page reviews on people and they’ve trimmed it down over the years because the place had been outrageous. I mean, it starts late August and it would be over in late October and a producing manager’s time, a lot of it, would be spent doing these team reviews.
Firms that do comprehensive evaluations for sales and trading spend unnecessary time and effort soliciting reviews from their employees even though they already have ready access to profit and loss records that provide relatively objective criteria of performance. In fact, rather than increasing the time intensiveness of the review process, these firms might actually reduce it and improve the equity of its outcome by using existing measures of production and limiting the impact of coworker and manager impressions. Some firms already do this for sales and trading and for asset management. But in some cases they seem to fetishize performance reviews and the erroneous belief that these capture merit.
Another lesson of the most successful women was that women do best in jobs that are not relationship intensive. This contradicts stereotypes of women as “better at relationships” but follows from preferences among clients to work with those who resemble themselves. But not all women can enter high-paying jobs that are not relationship intensive because there are not enough jobs like that to go around—it is a relationship-intensive business. And even if a sufficient number of such jobs existed, if all women tried to enter those areas then they would soon become female job ghettos, and substantial evidence suggests that the pay would then go down.9 Real equality also requires that women be able to succeed in the high-paying jobs that are dependent on relationships with clients or on teamwork. So what can securities firms do on this front?
Wall Street firms could reduce the impact of client preferences by prohibiting gender-stereotypical client entertaining activities. They could forbid workers of all ranks from taking clients to strip joints or on hunting expeditions. (To make it fair, they could also prohibit activities that are stereotypically feminine.) While some might view this as overly restrictive and politically correct, I suspect that these firms already prohibit their workers from taking clients to certain types of events. Imagine, for a moment, how management would react to a group of investment bankers taking a client to see Michael Moore or to a religious revival—it just would not happen. A similar logic could apply to events that are unfriendly to women. The firms could then solicit input from both men and women at all levels to establish a list of recommended alternatives for client entertainment. Since clients hire Wall Street firms to raise capital—not to arrange their social lives—they should not object to these changes, especially if firms can be creative about the alternatives.
To further reduce the impact of social psychological tendencies that disadvantage women workers, Wall Street firms could also encourage greater equality with a few very specific affirmative action and diversity initiatives. In the most male-dominated jobs, they could specifically try to retain and promote more women to create a better gender balance and to expand the pool of women available as mentors for junior women. The problem is not that there are no women in the senior ranks of investment banking, sales, and trading, but there definitely are not enough to reduce the impact of preferences for men or tokenism processes. Some affirmative action measures could help alleviate this in the short run. In the long run they could make it easier for women to find mentors who resemble them and for typically female work styles and relational skills to be appreciated and compensated, short-circuiting the structural discrimination.
Another issue, which I discussed at length in chapter 7, is the problem of work-family policies. Wall Street firms have already introduced these policies, but they cannot move beyond window dressing without some substantial reforms. These firms must assess the costs of losing women when they have children. If replacement and training costs are high, then there is a business case to reduce these costs by making the options that are available on paper more available in reality.10 Some women believed that job shares could work well in sales and trading because they would not reduce the coverage on their accounts and clients could still maintain ongoing relationships with their salespeople or traders. But women who tried to work out these arrangements met resistance. Wall Street firms need to educate senior managers about the economic costs of attrition due to work-family conflict and the potential economic benefits of retaining highly trained and skilled workers by accommodating their family responsibilities. Making room for family life may present the biggest challenge to Wall Street’s workaholic culture and its potential for gender equity, but it could help securities firms retain valuable female employees and improve the opportunities for women.
In terms of hours, the best individual strategy for women who wanted to have children while still being successful was to work in sales and trading. There they could work predictable market hours while being rewarded for measurable profits and losses. But these areas were among the most hostile environments for women, filled with male bravado, harassment, and discrimination. Discrimination against mothers, who are penalized over and above changes in their career commitment and performance, was especially common. These women should receive rewards proportional to their contributions, which could again be aided by closely connecting tangible measures of performance to bonuses. Without that, hostility and discrimination toward women, especially if they have children, will remain pervasive problems that lead some women to leave the labor force or change jobs after having children. The women who left were at least partly responding to dissatisfaction with their jobs or their treatment at work. Recognizing that women who leave their jobs often experience “pushes” from the workplace as well as “pulls” toward the home might encourage managers and human resource specialists to work harder to improve the satisfaction of skilled women with children and to provide win-win accommodations.
Selling Women Short has demonstrated that gender inequality coexisted with a compensation system that aimed to pay for performance. Men and women on Wall Street believed that the securities industry had mellowed since the era when blatant sex discrimination and sexual harassment were tolerated, as described in Liar’s Poker, The Bonfire of the Vanities, and Tales from the Boom-Boom Room. But gender inequality remained, and many of the processes that maintained a boys’ club in the higher echelons of Wall Street were subtle and operated through the performance review system. Economically irrational gender inequality persisted in Wall Street’s highly rationalized compensation system because performance evaluations were vulnerable to gender double standards and subtle discrimination.
Wall Street workers reveal that organizations can maintain a myth of rationality, efficiency, and meritocracy while producing inequality that is not economically rational or based on merit. Gender stereotypes powerfully, if subtly, influenced evaluations of performance and this prevented Wall Street from being a genuine meritocracy. The fact that Wall Street created a gender hierarchy rather than a meritocracy should encourage other types of organizations, which are increasingly moving toward flat hierarchies and variable incentive structures like those of securities firms, to examine their own practices.
Many people find performance-based incentives appealing because they imply that people receive what they deserve based on their efforts. There are many longstanding performance-based reward systems, like the system of awarding grades based on academic merit. But any teacher can tell you that academic merit may not always be the only criterion for grades and that grading is not an exact science. There are, of course, better and worse methods for evaluating students’ performance, and Wall Street might take lessons from the field of education—but first there must be recognition that no performance-based system produces perfectly just results. This challenges the entrenched assumption that performance-based pay structures produce a meritocracy. But because the system’s winners support this ethos and the losers leave, the subjective influences that produce systematic inequality in opportunities and evaluations are often hidden.
What is encouraging is the fact that one quarter of the women succeeded within this system by its own standards. While their numbers in this cohort may have declined since the time of the original study, their experiences demonstrate that the glass ceiling is not impermeable. Women may eventually attain equity if firms can make the criteria for allocating work and evaluating performance more tangible and measurable. As organizations increasingly move toward variable pay and performance-based incentives, they should take this lesson to heart and work to develop clear and tangible measures of performance. Legal authorities vested with the protection of equal employment opportunity can also incorporate the findings of this study into their interpretations of discrimination cases involving workers who receive performance-based pay by scrutinizing performance evaluations carefully for bias and recognizing the effects of subtle and unconscious discrimination. Diversity committees in organizations should also tackle unconscious preferences and prejudices in an affirmative way, especially in the areas that have traditionally been the most male dominated or hostile to women entrants.