Finance Research Letters 12 (2015) 11–16

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Compensation and competition for talent:

Evidence from the financial industry q
Mariassunta Giannetti a,⇑, Daniel Metzger b
a
Stockholm School of Economics, CEPR and ECGI, Sweden
b
Stockholm School of Economics, Sweden

a r t i c l e i n f o a b s t r a c t

Article history: We show that long-term compensation is associated with higher

Received 4 November 2014 pay in the financial industry and this association is stronger in
Accepted 22 December 2014 markets with high competition for talent. We argue that this
Available online 3 January 2015
evidence supports models of competition for talent based on
retention motives.
JEL classification:
Ó 2014 Elsevier Inc. All rights reserved.
G34
J31
J33
J41
J44
M52

Keywords:
Competition for talent
Retention
Optimal contracts
Finance labor market

q
We are grateful to Xin Chang (Simba), Paul Oyer, Markus Schmid, Alexander Wagner, Lingling Wang and seminar
participants at the European Finance Association, the Challenges of Corporate Governance Conference at the University of Bath,
Nanyang Technological University, the University of Sidney and the University of Bristol for comments. Giannetti acknowledges
financial support from the Jan Wallander and Tom Hedelius Foundation and the Bank of Sweden Tercentenary Foundation.
⇑ Corresponding author at: Stockholm School of Economics, Box 6501, Sveavagen 65, 11383 Stockholm, Sweden. Tel.: +46 8
736 9607; fax: +46 8 31 81 86.
E-mail address: Mariassunta.Giannetti@hhs.se (M. Giannetti).

http://dx.doi.org/10.1016/j.frl.2014.12.007
1544-6123/Ó 2014 Elsevier Inc. All rights reserved.
12 M. Giannetti, D. Metzger / Finance Research Letters 12 (2015) 11–16

1. Introduction

Over the last several decades, compensation for talent has increased dramatically in many
professions. While most evidence comes from US CEOs, there is also research documenting that pay
has surged in the finance industry (Kaplan and Rauh, 2010; Philippon and Reshef, 2012).
An equally striking fact on top executive compensation is that a large fraction of the compensation
of the highest paid executives is incentive-based and often long-term (Murphy, 1999; Fernandes et al.,
2013). Surprisingly, there exists no systematic evidence on the structure of compensation in other
professions where talent matters.
This paper shows that the positive correlation between the level of pay and the proportion of long-
term compensation exists also in the finance industry. Furthermore, we exploit that the market for
employees below the top management is more likely to be geographically segmented (see Kedia
and Rajgopal, 2009, for a similar argument) and show that the correlation between level of pay and
long-term compensation is stronger in financial centers.
We argue that our findings are consistent with theories that stress the importance of competition
for talent (Murphy and Zabojnik, 2004; Gabaix and Landier, 2008 and Terviö, 2008). In financial
centers, there are presumably more firms that represent a good match for individuals’ skills. Thus,
in equilibrium, individuals’ productivity and consequently pay are higher. These theories alone,
however, cannot explain the correlation between level of pay and long-term compensation. The
pronounced reliance on long-term compensation for the highest paid employees in financial centers
indicates that employees’ retention matters (Oyer, 2004) as long-term compensation emerges in opti-
mal contracts to lengthen employees’ view on their tenure at the current employer (e.g., Holmström,
and Ricart-i-Costa, 1986 or Giannetti, 2011).

2. Data and empirical proxies

Our data is from Capital IQ People Intelligence and covers executives, board members, and invest-
ment professionals from global public and private firms. Contrary to previous literature focusing on
the executive of S&P500 financial firms (e.g., Fahlenbrach and Stulz, 2011), we focus on highly paid
financial industry employees, which do not serve on the board of directors. To the best of our knowl-
edge this is the first paper to explore the structure of compensation for non-executive employees in
the financial sector.
We identify employees in the financial sector or in a financial position selecting any employees
who have a job title or a function related to a financial position.1 This procedure leads to a sample
of 531 individuals located in 23 countries between 1996 and 2012, for a total of 2186 person-year
observations. Sample coverage is however limited for the earlier part of the sample and 70% of the obser-
vations are from the 2005–2011 period.2 The majority of individuals in our sample are employed by
banks and other financial firms, especially investment companies, a part of the financial industry in
which pay practices have not been explored before.
While 55% of the observations are from US firms, our sample provides unprecedented international
coverage of international pay practices in the finance industry. Outside the US, 70% of the observations
are from Australia, Canada, Hong Kong, and the UK; another 20% from France, Germany, India, South
Africa, and Switzerland.
We have information on the level and structure of pay and location (state/region and country
information).3 Panel A of Table 1 summarizes the compensation. The average (median) total pay is about
1 million USD (300k USD) for the finance professionals. We define the fraction of total long-term incentive

1
We search for the following keywords in the job title: ‘‘Portfolio’’, ‘‘Investment manager’’, ‘‘Hedge fund’’, ‘‘Mutual fund’’, ‘‘Asset
manager’’, ‘‘Analyst’’, ‘‘Equity’’, and ‘‘Trading’’. We exclude titles that are related to committee work. Alternatively, we search for
the following keywords in the function/role: ‘‘Equity analyst’’, ‘‘Fixed income analyst’’, ‘‘Investment banking’’, and ‘‘Investment
professional’’.
2
The results we present in Table 2 are statistically invariant if we restrict the sample to the period 2005–2011.
3
Fernandes et al. (2013) have similar sample size but focus on executive of listed companies in all industries. Also the US
coverage of the sample compares well with previous work (e.g., Kaplan and Rauh, 2010).
Table 1

M. Giannetti, D. Metzger / Finance Research Letters 12 (2015) 11–16

Variable definitions and descriptive statistics. This table presents summary statistics of our main regression variables. Unless noted otherwise, all variables are from Capital IQ.

Name of variable Description Mean sd p25 Median p75 N

Fraction of total long-term Fraction of restricted stocks plus stock grants plus options 0.09 0.18 0.00 0.00 0.09 2186
incentive pay plus LTIPs over total pay
Any long-term incentive pay Dummy that is equal to 1 if fraction of incentive 0.31 0.46 0.00 0.00 1.00 2186
pay is greater than 0
Fraction of bonus pay Fraction of bonus over total pay 0.16 0.23 0.00 0.00 0.28 2186
Any bonus pay Dummy that is equal to 1 if fraction of bonus 0.47 0.50 0.00 0.00 1.00 2186
pay is greater than 0
Total pay Value of total pay in 100k USD 9.6995 29.0825 0.7405 3.0100 8.4631 2186
Salary Value of salary pay in 100k USD 2.1636 2.9767 0.0000 1.6320 3.0000 2186
Bonus Value of bonus pay in 100k USD 2.9617 12.5676 0.0000 0.0000 1.4144 2186
Other annual compensation Value of other pay in 100k USD 0.0782 0.7608 0.0000 0.0000 0.0000 2186
Restricted stocks Value of restricted stocks in 100k USD 1.8428 20.7934 0.0000 0.0000 0.0000 2186
Stock grants Value of stock grants in 100k USD 0.0122 0.4404 0.0000 0.0000 0.0000 2186
Options Value of options in 100k USD 0.4310 2.1992 0.0000 0.0000 0.0000 2186
LTIPs Value of long-term incentive plans in 100k USD 0.0634 0.6814 0.0000 0.0000 0.0000 2186
All other pay Value of all other pay in 100k USD 2.1467 8.2597 0.0357 0.1784 0.7145 2186
Financial center (USA) Dummy variable that is equal to one if a state in the USA hosts 0.65 0.48 0.00 1.00 1.00 1210
a financial center (from Christoffersen and Sarkissian, 2009)
Financial center (worldwide) Dummy variable that is equal to one if a country hosts a financial 0.70 0.46 0.00 1.00 1.00 2186
center (from Global Financial Centers Index by the Z/Yen Group)

13
 14
Table 2
Level of Pay in the Financial Sector. The dependent variable is the logarithm of total pay. All variables are described in Table 1. Regressions are estimated using OLS and include year fixed effects
as well as country fixed effects (state fixed effects in the USA sample). Errors are corrected for heteroskedasticity.

Log(Total Pay)

M. Giannetti, D. Metzger / Finance Research Letters 12 (2015) 11–16

(1) (2) (3) (4) (5) (6) (7) (8)
Fraction of total long-term incentive pay 4.952** 2.914** 2.957** 2.535** 2.567**
[13.984] [5.362] [5.956] [6.079] [6.497]
Fraction of total long-term incentive 2.410** 1.266* 2.763** 1.901**
pay x Financial center [3.563] [1.823] [5.087] [3.261]
Fraction of bonus incentive pay 3.111** 3.169**
[13.617] [14.114]
Fraction of bonus pay x Financial center 1.898** 0.067
[6.497] [0.207]
Any long-term incentive pay 2.262** 0.990** 0.512**
[25.648] [8.070] [4.913]
Any long-term incentive pay x 1.706** 1.579**
Financial center [10.480] [10.620]
Any bonus pay 1.345**
[13.813]
Any bonus pay x Financial center 0.770**
[5.452]
Observations 2186 2186 976 2186 976 2186 2186 2186
Sample Full Full Non-USA Full Non-USA Full Full Full
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Country/State FE Yes Yes Yes Yes Yes Yes Yes Yes
R-squared 0.200 0.204 0.242 0.419 0.465 0.258 0.281 0.437
*
Denote significance at 10% level.
**
Denote significance at 1% level.
 M. Giannetti, D. Metzger / Finance Research Letters 12 (2015) 11–16 15

pay as the fraction of restricted stocks plus stock grants plus options plus long-term incentive plans
(LTIPs) over total pay; and a dummy any long-term incentive pay, which is equal to 1 if that fraction is
greater than 0. Thus, long-term pay includes any form of pay that is forward looking rather than tied
to past performance. We define analogous variables for individuals who receive bonuses.
We conjecture that competition for talent in the finance industry is stronger in financial centers.
To identify financial centers, we use the Global Financial Centers Index by the Z/Yen Group.4 As we
only have state-level information on firms in the US and country information worldwide, we define a
firm as operating in a financial center if the state hosts a financial center for US firms, or if the coun-
try hosts a financial center for firms outside the US. Given these definitions, about 70% of our obser-
vations are from countries with financial centers (65% of the US observations are from states with
financial centers).

3. Results

Table 2 shows that the level of pay in the financial sector is positively associated with the fraction of total long-term incen-
tive pay. This result does not depend on different practices across countries or time trends, because we control for these factors
throughout the analysis by including country (state for the US) and year fixed effects.
The correlation between the fraction of total long-term incentive pay and level of pay is even stronger in financial centers,
whether we consider the whole sample or restrict the analysis to non-US firms. For instance, based on the estimates in column
2, increasing the fraction of long-term incentive pay by one standard deviation is associated with an increase of 96% of total pay
in a financial center but only with an increase of 52% in the rest of the world. The results are not solely driven by the US and our
results remain robust when excluding the US (column 3).
In columns 4 and 5, we add the bonus as fraction of total pay as well as its interaction with the financial center dummy. Also
individuals who receive bonuses have higher pay. However, in financial centers, increases in pay are associated with larger
increases in long-term compensation (in column 5 the difference in coefficients between the interaction of the financial center
dummy with bonus and long-term pay, respectively, is statistically significant at the 1% level).
A possible concern is that the large positive relation between the level of pay and the fraction of long-term compensation
may depend on the fact that both the value of equity and the value of the payout associated with long-term compensation
increase when firms experience positive shocks to their performance. To mitigate concerns that the correlations we highlight
depends mechanically on firm performance, we use as an alternative measure of long-term compensation (bonus compensa-
tion) a dummy that takes a value equal to 1 if an individual is awarded any form of long-term compensation (bonus), and takes
a value equal to zero otherwise. Results in columns 6–8 are invariant. In particular, the estimates in column 8 still suggest that
long-term compensation is associated to significantly higher pay than a bonus in financial centers with a difference that is sta-
tistically significant at the 1% level.

4. Conclusions

Long-term compensation has been suggested to play a crucial role to understand why executive
pay has increased so much in the last decades. We show that long-term compensation is positively
associated with the level of pay also for non-executive employees in the financial industry, another
profession characterized by high competition for talent. Furthermore, the association appears stronger
in financial centers, indicating that retention motives are important drivers of the level and the
structure of compensation of high talent employees.

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4
These financial centers are Boston, Chicago, Los Angeles, New York, Philadelphia, and San Francisco in the USA and London,
New York, Hong Kong, Singapore, Zurich, Seoul, Tokyo, Chicago, Geneva, and Toronto in the worldwide ranking.
16 M. Giannetti, D. Metzger / Finance Research Letters 12 (2015) 11–16

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