Managerial Labor Market during Institutional Transition: A study of CEO compensation and voluntary turnover. (23rd December 2016)

• Record Type: Journal Article
• Authors: He, Lerong; Shaw, Tara Shankar; Fang, Junxiong
• Other Names: Armitage Seth guestEditor.; Hou Wenxuan guestEditor.; Sarkar Subrata guestEditor.; Talaulicar Till guestEditor.
• Is Part Of: Corporate governance. Volume 25:Number 3(2017)
• Page Start: 167
• Page End: 185
• Publication Date: 2016-12-23
• Subjects: Corporate governance -- CEO turnover -- executive compensation -- managerial labor market -- China; Corporate governance -- Periodicals; 658.1145
• DOI: 10.1111/corg.12187
• Languages: English
• ISSNs: 0964-8410

Abstract

Abstract: Manuscript Type: Empirical Research Question/Issue: This paper investigates the influence of CEO compensation on voluntary turnover and the moderating role of the managerial labor market. It explores how institutional contingencies related to labor market transparency, mobility, and competitiveness shape supply and demand conditions of the managerial labor market, and consequently affect the relationship between CEO underpayment and turnover. Research Findings/Insights: Using a sample of Chinese listed firms between 2002 and 2011, we document that underpaid CEOs are associated with a larger likelihood of voluntary turnover in China. Importantly, we find that CEO underpayment will increase the likelihood of voluntary turnover to a greater extent when executive compensation disclosure is mandatory, when regional labor mobility is higher, and when industry growth rate is larger. Overall, our study demonstrates that underpayment below the market rate motivates CEOs to exit their organizations and such a reaction is more likely to materialize when managerial labor market conditions are favorable enough to create a strong pull force. Theoretical/Academic Implications: This study adopts an interdisciplinary perspective built on institutional theory, organizational psychology, and labor economics to examine the role of the managerial labor market during institutional transition. It integrates the social psychological explanation of turnover with the perspective of labor economics by linking both pull side and push side drivers of organizational participation with demand and supply conditions of the managerial labor market. Practitioner/Policy Implications: This study suggests that the design of executive compensation should consider the ongoing labor market rate for retention and motivation reasons, especially when managerial talent is under tight supply and strong demand.