IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v63y2010i7p729-734.html
   My bibliography  Save this article

The impact of pay on CEO turnover: A test of two perspectives

Author

Listed:
  • Shen, Wei
  • Gentry, Richard J.
  • Tosi Jr., Henry L.

Abstract

We investigate the impact of pay on CEO turnover from two perspectives. One is managerial power perspective that focuses on power in the setting of CEO pay. The other is tournament theory that treats CEO pay as a top prize designed to motivate executives to work hard for the top position. Building on research that highlights the impact of power dynamics at the top of the firm on CEO turnover, we propose that managerial power perspective suggests a negative impact of CEO pay on CEO turnover, while tournament theory suggests a positive impact. Using data from a sample of 313 large U.S. companies from 1988 to 1997, we find that both the level of CEO pay and its ratio over the average pay of the firm's four other highest paid executives have a negative impact on CEO turnover.

Suggested Citation

  • Shen, Wei & Gentry, Richard J. & Tosi Jr., Henry L., 2010. "The impact of pay on CEO turnover: A test of two perspectives," Journal of Business Research, Elsevier, vol. 63(7), pages 729-734, July.
    • Handle: RePEc:eee:jbrese:v:63:y:2010:i:7:p:729-734
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148-2963(09)00150-7
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
    3. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-280, April.
    4. Sydney Finkelstein & Donald C. Hambrick, 1989. "Chief executive compensation: A study of the intersection of markets and political processes," Strategic Management Journal, Wiley Blackwell, vol. 10(2), pages 121-134, March.
    5. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-628, October.
    6. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    7. Mark Kroll & Peter Wright & Leslie Toombs & Hadley Leavell, 1997. "Form Of Control: A Critical Determinant Of Acquisition Performance And Ceo Rewards," Strategic Management Journal, Wiley Blackwell, vol. 18(2), pages 85-96, February.
    8. Donald C. Hambrick & Sydney Finkelstein, 1995. "The effects of ownership structure on conditions at the top: The case of CEO pay raises," Strategic Management Journal, Wiley Blackwell, vol. 16(3), pages 175-193.
    9. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
    10. Dahl, Drew, 1994. "Successor origin, initiating force, and managerial tenure in banking," Journal of Business Research, Elsevier, vol. 29(1), pages 47-55, January.
    11. Khan, Raihan & Dharwadkar, Ravi & Brandes, Pamela, 2005. "Institutional ownership and CEO compensation: a longitudinal examination," Journal of Business Research, Elsevier, vol. 58(8), pages 1078-1088, August.
    12. Ensley, Michael D. & Pearson, Allison W. & Sardeshmukh, Shruti R, 2007. "The negative consequences of pay dispersion in family and non-family top management teams: an exploratory analysis of new venture, high-growth firms," Journal of Business Research, Elsevier, vol. 60(10), pages 1039-1047, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lu, Yun & Ntim, Collins G. & Zhang, Qingjing & Li, Pingli, 2022. "Board of directors’ attributes and corporate outcomes: A systematic literature review and future research agenda," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Wei Shi & Brian L. Connelly & Wm. Gerard Sanders, 2016. "Buying bad behavior: Tournament incentives and securities class action lawsuits," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1354-1378, July.
    3. Gao(高凯), Kai & Wang(王玲), Ling & Liu(刘婷婷), Tingting & Zhao(赵华擎), Huaqing, 2022. "Management executive power and corporate green innovation——Empirical evidence from China's state-owned manufacturing sector," Technology in Society, Elsevier, vol. 70(C).
    4. Ivana Vitanova, 2022. "CEO overconfidence and corporate tournaments," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1423-1438, July.
    5. Aleksandra Kacperczyk & Chanchal Balachandran, 2018. "Vertical and Horizontal Wage Dispersion and Mobility Outcomes: Evidence from the Swedish Microdata," Organization Science, INFORMS, vol. 29(1), pages 17-38, February.
    6. Sun, Sophia Li & Habib, Ahsan, 2020. "Determinants and consequences of tournament incentives: A survey of the literature in accounting and finance," Research in International Business and Finance, Elsevier, vol. 54(C).
    7. Humphreys, Brad R. & Paul, Rodney J. & Weinbach, Andrew P., 2016. "Performance expectations and the tenure of head coaches: Evidence from NCAA football," Research in Economics, Elsevier, vol. 70(3), pages 482-492.
    8. Chenli Yin & Dan Li & Maria Paz Salmador, 2022. "Institutional change of compensation policy and its impact on CEO turnover and firm performance," Review of Managerial Science, Springer, vol. 16(8), pages 2527-2552, November.
    9. Park, Jong-Hun & Kim, Changsu & Sung, Yun-Dal, 2014. "Whom to dismiss? CEO celebrity and management dismissal," Journal of Business Research, Elsevier, vol. 67(11), pages 2346-2355.
    10. Humphreys, Brad & Paul, Rodney & Weinbach, Andrew, 2011. "CEO Turnover: More Evidence on the Role of Performance Expectations," Working Papers 2011-14, University of Alberta, Department of Economics.
    11. Kevin Mayo & George Ball & Alex Mills, 2022. "CEO Tenure and Recall Risk Management in the Consumer Products Industry," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 743-763, February.
    12. Smith, Deborah Drummond & Pennathur, Anita K. & Marciniak, Marek R., 2017. "Why do CEOs agree to the discipline of dividends?," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 38-48.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sun, Sophia Li & Habib, Ahsan, 2020. "Determinants and consequences of tournament incentives: A survey of the literature in accounting and finance," Research in International Business and Finance, Elsevier, vol. 54(C).
    2. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    3. Tor Eriksson & Sabrina Teyssier & Marie‐Claire Villeval, 2009. "Self‐Selection And The Efficiency Of Tournaments," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 530-548, July.
    4. Ian Gregory-Smith & Peter W Wright, 2019. "Winners and losers of corporate tournaments," Oxford Economic Papers, Oxford University Press, vol. 71(1), pages 250-268.
    5. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. Fredrik Heyman, 2005. "Pay inequality and firm performance: evidence from matched employer-employee data," Applied Economics, Taylor & Francis Journals, vol. 37(11), pages 1313-1327.
    7. Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
    8. Josse Delfgaauw & Robert Dur & Arjan Non & Willem Verbeke, 2015. "The Effects of Prize Spread and Noise in Elimination Tournaments: A Natural Field Experiment," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 521-569.
    9. Lin, Ying-Fen & Yeh, Yaying Mary Chou & Shih, Yu-Ting, 2013. "Tournament theory's perspective of executive pay gaps," Journal of Business Research, Elsevier, vol. 66(5), pages 585-592.
    10. Jorien L. Pruijssers & Pursey P. M. A. R. Heugens & J. Oosterhout, 2020. "Winning at a Losing Game? Side-Effects of Perceived Tournament Promotion Incentives in Audit Firms," Journal of Business Ethics, Springer, vol. 162(1), pages 149-167, February.
    11. Scott D. Graffin & James B. Wade & Joseph F. Porac & Robert C. McNamee, 2008. "The Impact of CEO Status Diffusion on the Economic Outcomes of Other Senior Managers," Organization Science, INFORMS, vol. 19(3), pages 457-474, June.
    12. Lackner, Mario & Stracke, Rudi & Sunde, Uwe & Winter-Ebmer, Rudolf, 2020. "Are competitors forward looking in strategic interactions? Field evidence from multistage tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 544-565.
    13. Edward P. Lazear & Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 91-114, Fall.
    14. Lin, Ming-Jen, 2008. "External market condition and tournaments: Theory and evidence," Economics Letters, Elsevier, vol. 99(1), pages 75-78, April.
    15. Christian Grund & Niels Westergaard-Nielsen, 2008. "The Dispersion of Employees' Wage Increases and Firm Performance," ILR Review, Cornell University, ILR School, vol. 61(4), pages 485-501, July.
    16. Zalewska, Anna, 2014. "Gentlemen do not talk about money: Remuneration dispersion and firm performance relationship on British boards," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 40-57.
    17. Benjamin, Daniel K. & Thornberg, Christopher, 2007. "Organization and incentives in the age of sail," Explorations in Economic History, Elsevier, vol. 44(2), pages 317-341, April.
    18. Coupé, Tom & Smeets, Valerie & Warzynski, Frederic, 2003. "Incentives in Economic Departments: Testing Tournaments?," Working Papers 03-25, University of Aarhus, Aarhus School of Business, Department of Economics.
    19. Jed DeVaro & Antti Kauhanen, 2016. "An “Opposing Responses” Test of Classic versus Market-Based Promotion Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 747-779.
    20. Bingley, P. & Eriksson, T, 2001. "Pay Spread and Skewness. Employee Effort and Firm Productivity," Papers 01-2, Aarhus School of Business - Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:63:y:2010:i:7:p:729-734. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.