Selecting Peers and Managing Retention Risk
15 Pages Posted: 20 Aug 2015
Date Written: August 18, 2015
Arguments about turnover and retention risk play a key role in executive compensation decision making, but it’s rare to see those arguments supported with empirical data. A recent academic paper highlighted that the Execucomp database tracks executives across firms and analyzed the impact of “job hopping” on the pay of the executives continuing to work at the job hopper’s old firm. In this paper, we show how the same tracking data can be used to improve peer group selection and measure the impact of premium pay, unvested deferred compensation and stock ownership on retention risk. Key findings from our analyses are: (1) commonly used peer group selection models, including the ISS model, capture less than a quarter of job hop “landing” spots, (2) job hoppers experience a wide range of pay outcomes, with more than a third having lower pay, but the vast majority move to a position with a market rate within 10% of their old position’s market rate, (3) companies experiencing job hop turnover increase their pay (vs market) by 5% on average, with bigger increases at lower paying firms and firms with more turnover, and (4) stock ownership is associated with lower job hop turnover but the impact of pay (vs market) is paradoxical: high pay is associated with higher job hop turnover and low pay is associated with lower job hop turnover. We discuss alternative explanations for the pay/turnover paradox, show how to improve peer group selection, develop better market rates and find a competitive positioning that’s not “stuck in the middle” with target pay levels that are too high to be cost-efficient vs low payers and too low to be effective vs high payers.
Keywords: executive pay, ISS, peer groups, retention risk, job turnover
JEL Classification: G30, J33 ,J41, J44, M52
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