It's Not (All) About the Money: Why Executives Switch Jobs

When it comes to executives and top managers, it is easy to assume that the most experienced, high-performing managers naturally go to the largest and best-paying firms. If you want the best and most experienced leaders, you better have a good compensation package waiting in the wings.

And that makes sense because the focus on executive compensation tends to revolve around three things: executive pay and firm performance, executive compensation packages, and executive experience. In short, if the company is doing well, its executives are in turn compensated well. Likewise, that compensation may include not just a base salary but a wide variety of bonuses, stock options, incentives, and other perks and personal benefits. Experience generally encompasses their overall human capital, from industry knowledge and experience, transferable skills across industries, education, to the roles executives have held previously.

But one area that has not been examined as thoroughly is the role geography plays in executive compensation. To close this gap in research, Walton College’s John Delery and his co-authors Panagiotis Giannakis (Pennsylvania State University), Dorothea Roumpi (Pennsylvania State University) and Lauren Aydinliyim (Baruch College, CUNY) examined the role geographical preferences play in executives’ choices in  “Executive Compensation: The Role of Human Capital and Geographic Preferences.”

The traditional assumption that Delery and his coauthors challenge is that in a perfectly competitive labor market executives switch jobs for higher pay and that geographic preferences play little or no role beyond individual tastes, preferences, or the desire to be around friends and family. Their research instead examines how various geographical factors can influence the compensation they are willing to accept when moving to a company. Just like many of us, executives might have a “wish list” of places they’d consider living and are willing to adjust their compensation demands accordingly.

Location Matters

Delery and his coauthors based their study on a data set of executive moves. From 2000 to 2015, they identified 378 moves among 351 executives at S&P 500 companies. They limited their search by only focusing on the five most highly paid executives at each firm, as the SEC requires these individuals’ compensation be publicly reported. They also examined IRS reports on state migration levels to get an idea of an area’s general desirability as well as the geographic location of each S&P 500 companies’ headquarters. Their analysis revealed that executives’ human capital, namely their education level and background, and the new job’s location played a noticeable role in determining how their compensation changed when they switched companies.

One notable finding is that while compensation increases with executive transitions, moving to a very desirable area can negatively affect compensation. Compensation, contrary to what we may have assumed in the past, is not the sole factor influencing executives’ decisions to change companies. An executive may be willing to accept a smaller increase in compensation if the location of the hiring company is a highly desirable one. For example, if executives view a location as a place they’ve always wanted to live, have connections to, or is desirable in some other way, the compensation package may not need to be as attractive as it normally would to lure them to a rival firm.

That said, proximity and density play a role. A higher density of executive roles in a given geographic area increases an executive’s compensation package when changing jobs. For example, if ten other S&P firms are in the same area, then this high concentration of executives may increase executives’ bargaining power when a rival firm is trying to lure them away from their current role. Good compensation packages have to become great packages if they want to be competitive.

Also, managers who attended high-quality educational institutions are often promoted more quickly and receive overall greater compensation. This higher level of educational achievement, especially for executives holding a PhD, grants them greater bargaining power because it is seen as denoting a high level of human capital. Human capital, especially when it comes to education, is highly rewarded and valued in executive searches.

How This Affects Your Firm 

It’s quite likely that everyone reading this article has been a part of a firm when it has either lost or recruited a new member of its executive team. And we all thus know the importance of hiring the right people for top management roles.

If you find yourself involved in these decisions or are just curious what motivates executives to accept a given offer, then the managerial implications of the research conducted by Delery and his coauthors could be the difference between a successful search and a stalled one.

The local competitive landscape matters: if your firm is headquartered in what may be a less-than-desirable location, as in an area with higher levels of out-migration than in-migration, a stronger compensation package may be required to attract and retain top talent. Similarly, if you are surrounded by rival firms – or even large firms that would represent an attractive landing spot – then higher compensation levels may be warranted to not only prevent others from poaching your talent but to lure other talented managers to your firm.

If your firm is headquartered in a desirable location, one with higher levels of in-migration than out-migration, then you may have more wiggle room in your offers than expected. Executives may forgo some financial gains for the opportunity to live in your area.

Education tends to change certain dynamics in this process as well. Hiring someone with a postgraduate education, especially a PhD, will generally require a higher compensation package than hiring someone from a prestigious university who has a lot of potential. A high level of specialized knowledge, analytical abilities, and research experience denotes a high level of human capital, which the executive labor market tends to reward.

Creating a compensation package for top talent may seem like a moving target, but this research can help managers develop a more holistic approach that goes beyond offering the highest salary. Yes, money is important, but it’s not everything. And in certain instances, as Delery and his coauthors demonstrate, these non-monetary factors can play a more pronounced role than expected in attracting, and perhaps retaining, executive talent.