Merit-based reward practices can unintentionally lead to pay disparities based on gender, race, and national origin. Here’s how companies can use data, transparency, and accountability to prevent that

For their companies to remain competitive and successful, many executives strongly believe that they need to recruit and retain top talent. And to do so, they must foster meritocracies — hiring, rewarding, and promoting the best people, based on their merit. As a result, the most progressive companies have created formal systems for ensuring that job applicants and employees are judged solely by their efforts, skills, abilities, and performance, regardless of gender, race, class, national origin, or sexual orientation. Executives might, for example, take great efforts to show their commitment to meritocracy by implementing performance reward systems that separate performance reviews from pay and reward decisions. But have such approaches helped workplaces become true meritocracies?

In research studying workplace inequality and merit-based pay, I have found that such approaches are no protection against demographic bias. (See “About the Research,”) When managers believe their company is a meritocracy because formal evaluative and distributive mechanisms are in place, they are in fact more likely to exhibit the very biases that those systems seek to prevent. Achieving meritocracy in the workplace can be more difficult than it first appears, and there may even be unrecognized risks behind certain efforts to discourage bias. According to my findings, the very belief that an organization is meritocratic may open the door to biased, nonmerit-based behavior when managers make key individual-level career decisions. In other words, certain gender, racial, and other demographic disparities might persist in today’s organizations not only despite management’s attempts to reduce them but also because of such efforts.

The good news is that establishing a more meritocratic workplace doesn’t require an inordinate amount of time or resources. It is a matter of establishing clear processes and criteria for the hiring and evaluation of employees (or, in fact, any employee career decision). It is also a matter of monitoring and evaluating the outcomes of such company processes, and of bestowing an individual or group within the organization with the responsibility, ability, and authority to ensure that those formal processes are fair. The collection and analysis of data on people-related processes and outcomes — what is referred to as “people analytics” — are key here, enabling companies to identify and correct workplace biases.

By Emilio J. Castilla

NTU Professor of Management at the MIT Sloan School of Management.

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