Research Insights: Maybe the grass is greener

Corporations rely on compensation programs to motivate top management team (TMT) members not only to perform well but also to remain. Understandably, TMT members compare their compensation with peers within and outside their corporations to determine whether to stay or leave, and this has been the focus of much research. Less well understood has been how executive pay comparison effects may hinge on local executive labor markets. Dense local labor markets boost employment options while limiting the personal and family switching costs incurred by moving. The question arises, how do local labor markets moderate the effects of pay comparisons on turnover among non-CEO TMT members? 

Jieun Lee, assistant professor in the department of management, with two co-authors, seeks to answer this question in an article, “Are Big Ponds Better? How Local Labor Markets Moderate Compensation Comparison Effects on TMT Turnover,” published in the Journal of Management.

Lee and her co-authors gathered data on non-CEO TMT member departures in S&P 1500 firms from 2000 to 2019, from varied sources including Compustat, Execucomp, BoardEx, Audit Analytics, and the US Department of Labor Statistics. Their final sample comprised 16,770 TMT members from 2,539 firms, totaling 69,457 TMT, member–firm-year observations, including 8,620 turnover events.

Their analysis found that dense local labor markets for executives weaken the effects of social comparisons and CEO tournaments on TMT member turnover by providing more job alternatives and decreasing switching costs. In such markets, TMT members rely less on internal comparisons and CEO pay gaps, turning instead to external opportunities. With easier access to alternative tournaments offering greater or more attainable rewards, the influence of pay comparisons on turnover diminishes. Further, most salient were pay comparisons with other TMT members in the local area. Higher-paid members gained visibility in dense labor markets, where high pay signaled ability, enhanced marketability, and eased mobility, making them more likely to leave. 

“In summary,” Lee and her collaborators write, “monitoring prime competitors in the local labor markets and the enticements that they offer may help firms proactively retain valued senior TMT members.”

View paper in the Journal of Management (2024), Are Big Ponds Better? How Local Labor Markets Moderate Compensation Comparison Effects on TMT Turnover.