Corporate executives who lose a colleague to another firm may have something to look forward to — a significant pay hike.
According to a new study published in Journal of Accounting and Economics, companies “dramatically” raise pay for their remaining executives after losing executives in a job-hopping event, the idea being to discourage others from jumping ship.
Comparing the year prior to the job-hopping event to the year afterward, the median total compensation for these incumbent executives increased 46% from $1.40 million to $2.04 million, researchers from universities in South Carolina, Singapore, and Australia concluded from an analysis of 510 executive job hops from 1993 to 2011.
Equity-based compensation accounted for the bulk of the pay hike, with the median increasing 102%, compared with 18% for cash compensation.
“[Our] paper provides empirical evidence that executive job-hopping activities in the managerial labor market are an important determinant of corporate compensation policies,” they said.
The pay increases are larger for executives with higher mobility than those with lower mobility and do seem to serve the retention goal. “We find that the pay raise is negatively associated with the likelihood of subsequent job hopping by incumbent executives, which suggests that the raise in pay helps to prevent incumbent managers from moving to other firms,” the study says.
The researchers also found that a “re-equilibration” of pay practices often takes place at firms that lose executives to other firms. Whereas in the year before the job-hopping event, executives in job-hopping firms received significantly lower compensation than those in their industry peer firms, there was no remarkable difference in compensation between the two groups in the year after the job-hopping event.
“This result suggests that job-hopping events reduce the pay deficiency of job-hopping firms relative to their industry peers,” according to the study.
The authors conclude their paper by suggesting they may have underestimated the effect of job hopping on executive compensation since, among other things, they did not account for cases where firms preemptively increased pay to prevent an executive from leaving.