The Advisors' Blog

– Liz Dunshee

Here’s the intro from this “Columbia Law School” blog:

Everyone knows executive pay is rising. None of us can agree about why. Our forthcoming study in The Accounting Review, “Matching Premiums in the Executive Labor Market,” points to one reason—executives are being compensated for the risk they bear when leaving one firm for another.

A company that wants to lure someone from another firm needs to bump up her compensation, as she’ll want a wage premium for sacrificing the comfortable fit with the current employer for the uncertainty of life at a new firm. This risk may be shared by both the company and the executive, but the executive still can command higher pay as a result. Tracking a sample of over 30,000 executives in S&P 1500 firms over 16 years, we show that executives receive about 15 percent higher pay when they jump to new companies.

What does this mean for firms? Hiring from outside, rather than promoting from within, requires firms to pay up. And, as executive tenures shorten, that entails more movement between firms—for which there must be more compensation. Simply put, greater mobility and risk have translated to higher pay.

While critics of executive pay argue greed and nepotism explain rising pay levels, our study suggests a less nefarious explanation—the evolution of the labor market toward greater external hiring is at least partly boosting executive compensation.