Why companies that call themselves meritocracies don't always pay equally

Managers who are told their company pays on merit alone give men bigger bonuses than women who do the same work. The promise of fairness is what produces the bias. Once managers are convinced the system rewards performance and nothing else, they stop scrutinizing their own decisions, and prejudice they would otherwise catch slips into the pay.

The finding comes from an experiment that MIT professor Emilio Castilla and Indiana University sociologist Stephen Benard ran with 445 people who had all managed real employees. The researchers split the managers into two groups and gave each one a different description of the same company. Then they asked everyone to read the employees' performance reviews and divide a bonus pool among them. Two of those employees, a man named Michael and a woman named Patricia, had identical records. Managers who read that the company paid on performance alone gave Michael $46 more than Patricia. Managers who read a description that never mentioned fairness gave Patricia $51 more than Michael. The only difference was whether the company called itself a meritocracy, and that alone was enough to make managers favor the man over an equally qualified woman.

The effect has a documented cause. A person who is convinced they are fair tends to trust their own judgment and check it less, so bias goes uncorrected. In a 2001 experiment, the psychologists Benoît Monin and Dale Miller found that people who were first allowed to reject a set of sexist statements then became more likely to choose a man over an equally qualified woman for a job. Castilla calls the workplace version the paradox of meritocracy. A pay-for-performance system deepens it, as does any public statement that the company rewards merit, because both reinforce a manager's belief that the workplace is already fair.

The bias embedded in merit-based systems

In earlier fieldwork, Castilla studied a large service company that used a two-stage system, in which one manager rated an employee's performance and a second manager decided pay based on that rating. Women there earned smaller raises than men who held the same job title, reported to the same manager, and received the same performance scores. The same shortfall applied to ethnic minorities and to employees born outside the country. The disparity was largest in bonuses. Coworkers can see promotions, hires, and firings, so unfair treatment there is easy to spot. Bonus amounts stay private. Castilla argues that managers feel less accountable for a decision no one else sees, which is why the bias appears mostly in bonuses.

Managers also disagree about what merit is. A second study by Castilla and colleague Aruna Ranganathan found that managers inside the same company define merit differently, often by the qualities that led to their own promotions. When managers measure merit by different standards, a company can't reward it consistently, whatever it claims about its process.

Together, these two problems can make a merit-based system produce the unfairness it was meant to prevent. A company can follow all of its own rules and still pay employees according to their gender or race as much as their performance, because the belief that the system is fair stops anyone from checking whether it is.

Common fixes such as diversity workshops, blind résumé screening, and rewritten job ads have limited effect, he writes, because companies apply them before identifying their specific problem. Castilla proposes instead that a company audit the decisions it already makes, tracking who applies for each job, who advances, who's promoted, and what each person is paid. The company should then check whether gender or race still predicts those outcomes after accounting for the skills and experience the job requires. If gender or race does, the cause is bias, and it can be traced to the specific decision behind it.

A data audit of pay and promotion decisions

Oftentimes, the problem has to do with the company's overall payroll structure. Castilla ran an audit at one large global company, reviewing 10 years of its pay and promotion records, and found women receiving smaller merit bonuses than men who performed at the same level. The reviews were equal. The problem was the payout. Bonuses weren't automatic, so the money went to whoever asked for it, and women asked far less often than men. When the company made every earned bonus automatic, the difference between men and women disappeared.

Google $GOOGL found a similar problem in its own data. Junior female engineers were promoted more slowly than comparable men because the men nominated themselves for promotion more often. After a senior leader shared the finding and encouraged all engineers to nominate themselves when ready, the difference in promotion rates disappeared.

Two practices reduce bias in these decisions. The first is accountability. Castilla's research shows that when one person or group is responsible for reviewing pay and promotion decisions, managers weigh those decisions more carefully, because they know someone will check them. The second is transparency. The company states plainly what criteria it uses and, where it can, publishes the results. Both practices cost little. They require only that a company's leaders let their decisions be examined.

Many companies have never run this kind of analysis on their own pay and promotion records. The data already exists in their systems. Until a company examines it, it can't know whether its pay rewards merit.