When the U.S. government bailed out the financial industry, it placed some compensation limits on the firms who got public funds. This triggered a debate about whether such limits would cause executives to flee their constrained firms for others who weren't under the government's thumb. The numbers are in, and they indicate that nearly 85% of executives did not abandon their firm just because they pay was restrained. Does that mean pay doesn't matter after all? Hardly.
Fifteen percent might not sound like much. But if you ask any company if they would mind losing the top 15% of their talent, I'm fairly confident they would all find that very, very bad. So I'd start by saying that I don't find 85% retention as impressive as the large proportion might suggest.
Here's what the New York Times believes caused most executives to stay:
The relative stability, at least within the executive suite, suggests that a soft job market, corporate loyalty and personal pride helped deter the feared management exodus at the companies hardest hit by the pay rules.
Let's consider these three possibilities and add another:
Soft Job Market
I think that first aspect is, by far, the most relevant -- and it shows why that this 15% was only the very best talent that departed. The pay limits were in place during late 2008 and the the early part of 2009 -- a time when virtually no financial institution had much money to spend in order to attract new talent. There were also few greener pastures: most large financial institutions were under pay restraints simultaneously.
So you can be pretty confident than anyone who did manage to find a firm willing and able to pay them more during this time was a true superstar who will be missed. I don't begin to doubt that there are other employees who would have liked to leave, but couldn't do so, because there just weren't many opportunities available. If you had pay limits placed on some firms during a time of economic expansion, I think you'd get a much, much higher rate of turnover. These restraints happened to be in place during the most severe financial crisis in decades.
I doubt corporate loyalty had much to do with it. After having spent some time working in finance, it was pretty clear that loyalty was rare -- even irrational. There's a feeling that no one's job -- particularly at a bank -- is ever safe. If a firm needs to cut costs or decides to change strategy, it won't hesitate laying you off, even if you're a strong performer. As a result, it's foolish to feel you should show any loyalty to your firm when you know it won't show any loyalty to you. That's why there's so much turnover in finance.
Personal pride, however, may have been a more significant factor. Those affected by the pay restraints were very high-level management. They're the ones who were mostly blamed for the bank's troubles, so they likely wanted to show that their actions didn't kill their firm and wanted to help ensure its survival.
Promises and Handshakes
I would also add another possible retention method: unofficial promises of future reward. Let's say that you were the CEO of a bailout bank in late 2008. One of your best executives is threatening to accept an offer at a British bank that is not under pay restraints. What do you do? You lament the government's rules, but assure the employee that, as soon as the limits are lifted, she will be rewarded handsomely. Remember, no one expected these limits to last forever; indeed, the banks shed them as quickly as possible. I wouldn't be surprised if you see some particularly big payouts over the next few years for executives who were under pay restraints during the crisis to sort of make up what was lost and reward for them for sticking with the firm.
Ultimately, I don't think the 85% retention statistic shows that pay restraints had little effect on these firms. As mentioned, losing 15% of top talent is significant. But most importantly, the rules were in effect during a time when very few jobs were available anyway. That's why I wouldn't have expected to see a huge talent drain. Pride may have had a little to do with it, but I doubt loyalty played much of a role. There were also almost certainly verbal promises made for better payments once the restraints were lifted.