In the years leading up to the recession, the talent market was hot. Unemployment in 2007 was hovering in the 4.5 percent range and U.S. GDP growth – while not as robust as the late 1990s – had recovered nicely from the business and geo-political turmoil of the early part of the decade.
These factors created a business environment where the need for new senior executive talent was at a premium, and the price companies were willing to pay for such talent showed it.
In a recent study of our executive placements since 2006, we found that executives changing jobs in the two years leading up to the financial meltdown enjoyed a windfall in terms of compensation increases. On average, they were receiving an increase in total compensation of almost 25 percent.
Executive pay drops with the economy – 56% in 2 years
Adding to low unemployment and high GDP growth, a key demographic issue seemed to be fueling this increased appetite for talent: the upcoming mass retirement of the Baby Boomer generation. The eldest of the Baby Boomers were turning 60 in 2006. They had recouped their investment losses, their retirement accounts were bursting at the seams, and they appeared on the verge of enjoying the “New 40” at their leisure. Then, well, you know the story.
As the enormity of the financial meltdown took hold in late 2008, it threw U.S. corporations into turmoil. At first, they were paralyzed and began instituting hiring freezes across the board. After realizing in 2009 that there were no quick fixes to the ills that afflicted the economy, companies began implementing austerity programs that doubled the unemployment rate from the end of 2007, peaking at 10 percent in 2009.
The financial meltdown quashed the boosts in pay that senior executives moving into new roles had come to enjoy and expect in a robust economy. Not surprisingly, as the demand for talent dried up through the depths of the recession in 2008 and 2009, so did the premium companies were previously willing to pay when hiring new executives.
While still on the plus side, compensation increases for executives changing jobs during this period decreased by 56 percent from just two years prior. Executives entering a new role could expect an average compensation increase of 11.07 percent, as analyzed in the Salveson Stetson Group study.
Companies stopped creating new jobs, and the Baby Boomers who had planned to retire took a look at their decimated portfolios and came to terms with the fact they would need to work for another five to 10 years – thus eliminating two major drivers for bringing in new talent.
Recovering, but slowly
But there has been some encouraging news in the most recent period. Our study shows that since 2010 senior executives have received an average compensation increase of 16.56 percent when they switched jobs. This represents a 33.2 percent increase from the 2008 to 2009 period but is still way off pre-recession levels.
Based on anecdotal evidence from our clients, we believe that an increased investment in growth has played a part in this recovery. During the depths of the recession, companies were only contemplating new hires to replace executives who had left the company, and reluctantly at that. Within the past two years, though, executive hiring has concentrated more on new jobs focused on growing the top line both organically and through mergers & acquisitions.
Even with this positive news, the slow bounce-back in pay increases for executives changing companies is emblematic of the sluggish nature of the economic recovery as a whole. Overall, our study shows that compensation increases are still down by more than 33 percent from 2006 and 2007. If this rate of increase remains relatively constant moving forward, don’t expect to see a return to pre-recession pay premiums for another two to three years.