A finance expert has shed light on the private world of executive recruitment and remuneration, and says managerial salaries are strongly impacted by job hopping.

A new paper by Dr Juan Luo says that after a company loses one or more of their executives to another firm, they often give dramatic pay rises to their remaining executives.

“We looked at more than 500 examples of executive job hopping from 1993 to 2011. From the year prior to the job-hopping incident to the year afterwards, the median total remuneration package for executives who remained in their role after a colleague accepted a position at another firm increased from $1.40 million to $2.04 million (an increase of 46 per cent),” says Dr Luo.

“Furthermore, remuneration package increases experienced by remaining executives were more likely to be in the form of equity-based compensation (stock and option grants rather than actual cash).”

“The median cash compensation increased from $0.76 million to $0.90 million (an 18 per cent increase). In contrast, the median equity-based compensation increased from $0.39 million to $0.79 million (a 102 per cent increase).”

“This evidence suggests that after losing top executives, firms not only increase the level of total compensation for their remaining managers, but they also rely more on equity-based compensation for the purpose of better retention,” she says.

Dr Luo also found the pay raise was more pronounced when the remaining executives had greater employment mobility, when companies lost senior executives, and when job hoppers received favourable job offers from other firms.

“We found that executive compensation in job-hopping firms was not as competitive as their industry peers in the pre-hopping period, but this pay deficiency largely diminished in the post-hopping period,” says Dr Luo.

She further investigated whether the job-hopping firm’s subsequent pay raise indeed helped to retain the remaining managers.

“We found that pay raises are associated with reduced incidences of job hopping by remaining executives, which suggests that the raises in pay help to prevent managers from moving to other firms,” says Dr Luo.

Dr Luo’s study provides empirical evidence on the influence of the managerial labour market on executive compensation, which is relatively under-explored in existing research due to the unavailability of confidential information on executive recruiting.