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

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

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    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 63 (2010)
    Issue (Month): 7 (July)
    Pages: 729-734

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    Handle: RePEc:eee:jbrese:v:63:y:2010:i:7:p:729-734
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    1. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-15, September.
    2. 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 262-80, April.
    3. 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.
    4. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-80, June.
    5. 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 841-64, October.
    6. 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 606-28, October.
    7. 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.
    8. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
    9. Dahl, Drew, 1994. "Successor origin, initiating force, and managerial tenure in banking," Journal of Business Research, Elsevier, vol. 29(1), pages 47-55, January.
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