Can Equity Incentives Help Explain the Low Share of Females in Top Management?

Emilie Malén Listou Grimen & Sara Sofie Brandt

Student thesis: Master thesis


Despite the increased gender equality in higher education and the growing participation of women in the labor market, the share of female top executives remains low. At the same time, the increased focus on shareholder value creation has resulted in a growth of equity-based compensation. The aim of this
thesis is to assess whether there is an association between the use of equity incentives in top management and the low share of female top executives. The study is based on a sample of 13,410 firm-year observations from 1808 US-listed firms in the period 2007 - 2016.
Following previous literature, we use vega and delta to measure equity incentives. Vega measures the sensitivity of an executives’ wealth to stock return volatility and delta the sensitivity of an executives’ wealth to stock price. Previous research shows that women are inherently more risk averse and less competitive than men and thus prefer “safe” compensation packages that do not rely on performance.
Therefore, we expected female top executives to have lower vega and delta than men and shy away from top management of firms that rely strongly on equity incentives to reward their top executives.
We find that female top executives have significantly lower vega and delta compared to males and that a higher management team vega associates with reduced probability of observing a female top executive.
We argue that the association between vega and firm risk might explain this association. Our main conclusion is however that each executive’s incentives matter more than the average across the top management team. Vega is associated with reduced probability of observing female lower executives,
while delta is associated with reduced probability of observing female CEOs. We further show that the level of salary compensation the female executive receives for holding equity risk cannot help explain women's representation in different top executive positions. Moreover, the fact that female CEOs can hold higher delta compared to males without it having a negative impact on firm performance implies that females in the highest top executive positions are not more averse to equity risk than their male counterparts. We discuss the possibility that the female risk aversion observed in the lay population does not apply to female CEOs. However, for women holding other top executive positions delta, is associated with reduced firm performance. This might indicate an aversion to equity risk and that
incentivizing female top executives with equity might not be beneficial. We find that the presence of women in top management is negatively associated with the probability of observing an increase in the number of female top executives. We discuss how this might indicate that firms are only willing to employ a limited number of female top executives.
Our results imply that in setting compensation policy, one should consider how the average vega across the management team might make females reluctant to top executive positions. Further, each individual position should be considered by itself when determining delta for top executives.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2018
Number of pages109
SupervisorsAleksandra Gregoric