Economic and psychological mechanisms in managerial turnover

What does “CEO of the Year” awards mean to the rest of top managers working with the award-winning CEOs? Studies have shown that CEO awards bestowed by recognized media serve as a strong competitive advantage to award-winning CEOs and their firms, but also dramatically increase CEO compensation. This study examines how CEO awards influence economic and psychological mechanisms in the top managers’ decision to exit their firms.

Management scholars developed the pull-and-push theory in voluntary turnover. The theory suggests that one can exit his/her firm due to the ease of moving posed by alternative jobs (i.e., the “pull” or economic mechanism) or the desire to move due to low job satisfaction (i.e., the “push” or psychological mechanism). Using the pull-and-push theory, the paper investigates the following questions: (1) Does a CEO award increase managerial turnover? (2) Which mechanism–pull, push or both–is the reason for the turnover? (3) If the turnover occurred due to the pull of the market more than the push of low satisfaction, would the next job position or compensation look different between the two groups?

Winning “CEO of the Year” or “Best Performing Manager of the Year” awards by recognized media, such as BusinessWeek or Forbes, puts the award-winning CEOs and their firms in spotlights and increases the value of both CEOs and their firms. Studies suggest that firms with award-winning CEOs attract stakeholders to contract with the firm, receive an increase in the premiums paid for initial public stock offerings, and generate abnormal stock returns. Moreover, scholars found that CEOs compensation increases by 11% to 44% subsequent to winning CEO awards.

These effects of CEO awards have spillover effects to the rest of top managers working with the CEOs. Top managers working with such competitive CEOs may receive more attention from executive labor market and find attractive offers from other firms, perhaps even for a CEO position. This represent the enhanced pull factor (economic mechanisms) in turnover. Further, the greater compensation gap between award-winning CEOs and themselves can lead to lower job satisfaction for the top managers. Some may feel that they contributed to the firms’ success and their CEOs received much credits for their contributions. This represent the enhanced push factor (psychological mechanism) in turnover. Our study investigate the pull and push factors independently and simultaneously.

We used 25 years of panel data on more than 2,000 top managers across industries in the United States and found that CEO awards (an economic mechanism) and low compensation (a psychological mechanism) independently have positive effects on turnover. Turnover due to the economic mechanism leads to a higher position and pay, whereas turnover due to the psychological mechanism does not guarantee the same outcome. Further, when examining how pay dissatisfaction influences turnover simultaneously with CEO awards, we find that managers with the highest pay leave their firm, and not those with the lowest pay. Our result shows that CEO awards provide an interesting twist in terms of which manager finds the most discontentment in his/her job. When combined with the effect of CEO awards, we find that the top manager who is most valued in his/her team next to the CEO feels the lowest job satisfaction (i.e., strong push factor) – and not the top manager who is least paid. In other words, a CEO award can change what constitutes as a push factor in managerial turnover. Subsequent to the CEO award announcements, seeing their CEOs winning overnight money and fame can generate a strong job dissatisfaction (than a pay gap) for the most competent top managers.