Wednesday, March 24, 2010

Do Pay Caps Really Drive People Away?

One of the big arguments I recall against capping executive pay was that caps would lead to the flight of talent from companies with caps. Here's some evidence that points to that concern not being that big of a deal. Of course, just because they didn't leave doesn't mean that they are working as hard as they did without caps.
Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.


  1. I am not so sure this is the appropriate interpretation. How many executive would still be with the company otherwise?

    A back of the envelope calculation indicates that this would be appropriate if average careers were 12 years [If there were 1/12 chance in leaving per year, after two years we have 84% = (1-1/2)^2 leaving]. If, on the other hand, company spells by executives averaged 20 years, (purely conjecture on my part), we would expect ~90% to have left. Moreover, in this case, he probability of observing only 88 remaining with 104 initial executives would only be 5% [assuming a binomial distribution].

  2. "~90% to have left"

    oops, that should have been "~90% to remain"

  3. I agree that the appropriate comparison is what would have happened in the absence of the pay caps (can we force the execs to participate in a lab experiment?).

    But, it seems that we have to assume fairly long average career lengths (like the 20 years you mention) to believe the caps are creating higher exit rates. Yes? What if we assume average career lengths are shorter (say five or six years)?