Abstract
While most studies of the formalization of pay systems suggest that it helps reduce inequality, some recent studies suggest the opposite. The present study draws on social identity theory to shift this debate from whether formalization reduces inequality to when, or under what conditions, less formalized pay systems may also serve to reduce inequality. Specifically, I consider both the gender of the decision maker and the job of the employee being evaluated. The goal of this study is to determine whether male and female managers differ in how they use the discretion afforded by less formalized pay systems, and to identify the implications for pay among employees at different levels of the organizational hierarchy. Among 857 employees in 120 retail branches of a financial services firm, I find evidence of less gender pay inequality in terms of less formalized components of pay for employees reporting to a female manager. However, this effect is only among employees in the lowest organizational ranks. These findings demonstrate that it is critical to take manager gender and the organizational position of the employees being evaluated into account when assessing the relationship between the formalization of pay and gender pay inequality.