Implications of Multiple Concurrent Pay Comparisons for Top-Team Turnover

Article (PDF Available)inJournal of Management 43(3) · June 2014with 179 Reads
DOI: 10.1177/0149206314539349
Cite this publication
Abstract
This article relies on tournament and social comparison theorizing to understand how multiple concurrent pay structures and, thus, potential for comparison to multiple referents, affect turnover in the CEO?s top team. Specifically, we explore how the concurrent effects of pay dispersion within the CEO?s top team, pay disparity between the team and the CEO, and pay level in comparison to top teams at other firms in the industry affect turnover among members of the CEO?s top team. Consistent with social comparison theorizing, we find that pay dispersion is positively associated with turnover within CEO?s top teams. We also find that pay disparity has an effect consistent with tournament theorizing in which firms with greater tournament prizes (i.e., CEO salary gap) have lower turnover within their CEOs? top teams. Furthermore, we find that pay disparity interacts with both pay dispersion and pay level to affect turnover within CEOs? top teams. These results have theoretical and practical implications for CEOs? top-team pay design in organizations. Specifically, our findings imply that theoretical mechanisms associated with how firms compensate executives?and the inherent comparisons in which those pay structures result?work in concert to affect turnover within the CEO?s top team. Hence, to understand the effect that compensation has on executives? subsequent responses, researchers and practitioners must consider multiple concurrent pay references simultaneously.
Figures - uploaded by Aaron D. Hill
Author content
All content in this area was uploaded by Aaron D. Hill
Content may be subject to copyright.
http://jom.sagepub.com/
Journal of Management
http://jom.sagepub.com/content/early/2014/06/19/0149206314539349
The online version of this article can be found at:
DOI: 10.1177/0149206314539349
published online 23 June 2014Journal of Management
Jason W. Ridge, Aaron D. Hill and Federico Aime
Implications of Multiple Concurrent Pay Comparisons for Top-Team Turnover
Published by:
http://www.sagepublications.com
On behalf of:
Southern Management Association
can be found at:Journal of ManagementAdditional services and information for
http://jom.sagepub.com/cgi/alertsEmail Alerts:
http://jom.sagepub.com/subscriptionsSubscriptions:
http://www.sagepub.com/journalsReprints.navReprints:
http://www.sagepub.com/journalsPermissions.navPermissions:
What is This?
- Jun 23, 2014OnlineFirst Version of Record >>
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Journal of Management
Vol. XX No. X, Month XXXX 1 –20
DOI: 10.1177/0149206314539349
© The Author(s) 2014
Reprints and permissions:
sagepub.com/journalsPermissions.nav
1
Implications of Multiple Concurrent Pay
Comparisons for Top-Team Turnover
Jason W. Ridge
Clemson University
Aaron D. Hill
Federico Aime
Oklahoma State University
This article relies on tournament and social comparison theorizing to understand how multiple
concurrent pay structures and, thus, potential for comparison to multiple referents, affect turn-
over in the CEO’s top team. Specifically, we explore how the concurrent effects of pay dispersion
within the CEO’s top team, pay disparity between the team and the CEO, and pay level in com-
parison to top teams at other firms in the industry affect turnover among members of the CEO’s
top team. Consistent with social comparison theorizing, we find that pay dispersion is positively
associated with turnover within CEO’s top teams. We also find that pay disparity has an effect
consistent with tournament theorizing in which firms with greater tournament prizes (i.e., CEO
salary gap) have lower turnover within their CEOs’ top teams. Furthermore, we find that pay
disparity interacts with both pay dispersion and pay level to affect turnover within CEOs’ top
teams. These results have theoretical and practical implications for CEOs’ top-team pay design
in organizations. Specifically, our findings imply that theoretical mechanisms associated with
how firms compensate executives—and the inherent comparisons in which those pay structures
result—work in concert to affect turnover within the CEO’s top team. Hence, to understand the
effect that compensation has on executives’ subsequent responses, researchers and practitioners
must consider multiple concurrent pay references simultaneously.
Keywords: turnover; tournament theory; social comparison theory; inequity; pay disparity;
pay dispersion
Introduction
A growing body of literature highlights the notion that the distribution of pay affects the
behaviors of top management teams (Baron & Pfeffer, 1994; Carpenter & Sanders, 2002;
Corresponding author: Jason W. Ridge, Clemson University, 147 Sirrine Hall, Clemson, SC 29634, USA.
E-mail: jridge@clemson.edu
539349JOMXXX10.1177/0149206314539349Journal of ManagementRidge et al. / Multiple Concurrent Pay Comparison Referents
research-article2014
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
2 Journal of Management / Month XXXX
Jordan, 2010; Main, O’Reilly, & Wade, 1993; Messersmith, Guthrie, Ji, & Lee, 2011; Shaw,
Gupta, & Delery, 2002; Siegel & Hambrick, 2005). In general, this line of inquiry argues that
executives compare their compensation to referent others (Adams, 1965; Festinger, 1954)
and that differences in pay affect motivation and feelings of equity that, in turn, have impor-
tant ramifications for how top management teams collectively respond to pay distributions.
Scholars identify three referents to which top management team members compare compen-
sation: (a) vertical referents (the CEO), (b) internal horizontal referents (other top manage-
ment team members within their firm), and (c) external horizontal referents (the market or
top management team members in similar firms). Despite the fact that executives make com-
pensation comparisons to all three referents concurrently and that responses may differ on the
basis of the referent to which compensation comparisons are drawn (Henderson &
Fredrickson, 2001; Messersmith et al.), extant research has yet to consider how comparing
pay to all three referents concurrently affects top management teams’ collective responses.
This is problematic in that our understanding of the theoretical mechanisms that link com-
pensation comparisons to collective responses may be obfuscated by our failure to address
the unique and interactive effects of comparisons drawn simultaneously to multiple referents.
That is, while differences in compensation have important effects on motivation and feelings
of equity, without considering how motivation resulting from a large difference in pay
between the top management team and the CEO (e.g., Heneman, 1992; Lambert, Larcker, &
Weigelt, 1993; Zenger, 1992), feelings of inequity arising from large differences among top
management team members at the same hierarchical level (e.g., Bloom, 1999; Siegel &
Hambrick, 2005), and responses to pay in comparison to the market (e.g., Brown, Sturman,
& Simmering, 2003; Messersmith et al., 2011; Wade, O’Reilly, & Pollock, 2006) work in
concert, we cannot develop a full understanding of social comparison theorizing and, relat-
edly, the effects of various executive compensation arrangements. We address this void by
investigating both the unique and the interactive effects of compensation structures and the
subsequent comparisons drawn to the three different referents on turnover within the top
management team.
Specifically, we look at how comparisons of pay with three different referents affect turn-
over within the CEO’s top team, or the four highest-paid non-CEO executives (Carpenter &
Sanders, 2002, 2004; Fredrickson, Davis-Blake, & Sanders, 2010). We do not include the
CEO in the CEO’s top team because we develop arguments based on tournament theory; as
Fredrickson et al. point out, “The incumbent CEO has already won the rank-order tourna-
ment” (1032), and, as such, is no longer in the competition. Therefore, the incentive effects
associated with pay disparity (the gap in pay between the CEO and his or her top team) sug-
gested by tournament theory do not apply to the CEO but do apply to those still in competi-
tion to win the tournament (those located one hierarchical level below the apex of the
organization—the members of the CEO’s top team).
Using the CEO’s top team allows us to assess the effect of compensation comparisons
drawn to referents vertically (i.e., to the CEO) and horizontally (i.e., to top management team
members in their firm and in the market). After delineating these different referents, we posit
that the relationship between compensation comparisons and turnover within the CEO’s top
team will be dependent upon the referent to which comparisons are made. Additionally, we
suggest that these differing comparisons also interact to affect turnover. More specifically,
we first argue that consistent with behavioral perspectives (Bloom, 1999; Bloom & Michel,
2002; Siegel & Hambrick, 2005), compensation structures result in comparisons among
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 3
referent others. When individuals then make internal horizontal comparisons, the differences
create feelings of inequity and resentment in those who receive less pay than do others at the
same hierarchical level. Thus, we posit that pay dispersion within a CEO’s top team will be
positively associated with CEO top-team turnover owing to pay disparity eliciting feelings of
inequity and resentment. Second, as suggested by tournament theory (Lazear, 1989; Lazear
& Rosen, 1981), we argue that compensation structures elicit vertical pay comparisons.
When individuals compare their compensation to a vertical referent, pay disparity creates
incentives to remain “in the tournament” (i.e., remain employed by the firm) in an attempt to
be promoted to the next hierarchical level and subsequently receive greater compensation.
Therefore, we argue that pay disparity between the CEO’s top team and the CEO will be
negatively related to turnover within the CEO’s top team. Additionally, we argue that the
three compensation comparisons of pay dispersion, pay disparity, and pay level act in concert
to affect turnover. While high levels of pay dispersion within a hierarchical level elicit feel-
ings of inequity and resentment, we argue that the strength of this resentment may be miti-
gated by the potential to reap higher rewards associated with pay disparity. Furthermore,
given that an individuals’ proclivity to exit a job is affected by what the market will bear in
terms of compensation upon finding a new job, we also argue that the effects of pay disparity
will be moderated by pay-level comparisons. Specifically, we hypothesize that the incentives
to win higher compensation associated with pay disparity will be weaker when pay level is
higher since individuals already receive above-market compensation.
Using a longitudinal, multi-industry sample of executives, we find evidence supporting
the notion that concurrent compensation structures and the associated comparisons that indi-
viduals make to multiple referents have both direct and interactive effects on turnover within
the CEO’s top team. That is, we find that pay dispersion and pay disparity, aspects of com-
pensation that result in comparisons by members of the CEO’s top team, have direct effects
for turnover within this group. Furthermore, we find that pay disparity and dispersion interact
both with each other and with pay level of the CEO’s top team relative to the market, sug-
gesting that aspects of compensation that executives are likely to compare across various
referents work in concert to affect turnover within the CEO’s top team. Our investigation
contributes to the literature on compensation comparisons in three important ways. First,
although a wealth of research addresses how pay dispersion, pay disparity, and pay level
affect turnover individually, we expand our understanding by addressing how the compari-
son of compensation to each of these three referents concurrently affects collective responses.
Since individuals compare their compensation to multiple referents at once, understanding
how those comparisons act in concert to affect turnover within the CEO’s top team expands
our knowledge of the theoretical mechanisms underlying compensation comparisons. In this
sense, our study addresses existing theoretical questions summarized by the Finkelstein,
Hambrick, and Cannella (2009) review of executive compensation structures (Shaw et al.,
2002; Siegel & Hambrick, 2005) by looking at the net effects of tournament and social com-
parison for turnover in the CEO’s top team. Second, many of the previous tests of compensa-
tion comparisons take place in single industry contexts (Becker & Huselid, 1992; Bloom,
1999; Brown et al., 2003; Henderson & Fredrickson, 2001; Pfeffer & Langton, 1993). Our
study contributes to the literature by testing these effects across a wide range of industries
and demonstrates the generalizability of compensation comparisons to a variety of settings.
Finally, given the importance of retaining executives (Aime, Johnson, Ridge, & Hill, 2010),
as Messersmith and colleagues note, “Providing a more complete understanding
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
4 Journal of Management / Month XXXX
of the internal dynamics linking compensation variables to turnover within this important
organizational group remains a salient area of investigation” (2011: 458). The present study
adds to our understanding of the role that compensation structure and the resulting compari-
sons made by executives play in turnover within CEOs’ top teams.
Theory Development and Hypotheses
The decision to leave a firm may come from the firm’s perspective (e.g., exodus due to
lower than expected performance) or from the executive. We build upon tournament and
social comparison theorizing, addressing how the distribution of pay elicits comparisons that
affect the behavior of top management teams (e.g., Baron & Pfeffer, 1994; Carpenter &
Sanders, 2002; Jordan, 2010; Main et al., 1993; Messersmith et al., 2011; Shaw et al., 2002;
Siegel & Hambrick, 2005) to focus on how such compensation arrangements relate to turn-
over of executives within the CEO’s top team. Comparisons of pay within an organization
can be conceptualized on either horizontal or vertical dimensions (Bloom, 1999; Bloom &
Michel, 2002; Kepes, Delery, & Gupta, 2009). Horizontal comparisons reflect differences
“among peers at a given hierarchical level,” such as within a CEO’s top team, whereas verti-
cal comparisons occur “across executive levels,” such as when members of the CEO’s top
team compare their salaries to the CEO (Siegel & Hambrick, 2005: 261). Beyond these inter-
nal compensation comparisons, scholars also note that individuals compare their pay with
external referents at the same hierarchical level, or “the market,” as well (Brown et al., 2003;
Messersmith et al.; Wade et al., 2006). Given that these referents differ in distinct ways and
that compensation comparisons are drawn to all three referents concurrently, we suggest that
differences in compensation compared to different referents may have both unique and inter-
active effects on turnover within the CEO’s top team.
Compensation structures elicit internal, horizontal comparisons such that executives
within a CEO’s top team will compare pay among themselves. Festinger (1954) suggests that
individuals routinely compare themselves with others whom they see as being similar on a
diverse set of attributes. Social comparison has direct implications for the CEO’s top team
because individuals who have reached that level in an organization are generally similar on
several dimensions, making them probable referents for each other (Andrews & Henry, 1963;
Finkelstein et al., 2009; Fredrickson et al., 2010; Henderson & Fredrickson, 2001; Hills,
1980; Wade et al., 2006). For instance, to reach the level of the CEO’s top team, executives
have navigated the organizational selection and promotion processes, subjecting each of
them to similar organizational filters (Fredrickson et al.). As such, executives in the CEO’s
top team are likely to be comparable in their educational backgrounds, their career experi-
ences, their viewpoints, and their general temperament (March & March, 1977). Therefore,
a large pay dispersion within the CEO’s top team will likely lead to perceptions of inequity
and deprivation among those members who are less well compensated within a group of
similar individuals (Aime, Meyer, & Humphrey, 2010; Bloom, 1999; Bloom & Michel,
2002; Cowherd & Levine, 1992; Crosby, 1976; Pfeffer & Langton, 1993), creating impaired
social relations and reduced behavioral integration within the team (Hambrick, 1995; Siegel
& Hambrick, 2005). One response to such comparisons is higher turnover within a hierarchi-
cal level (Bloom & Michel; Messersmith et al., 2011). As compensation structures become
increasingly dispersed within the CEO’s top team, lower-compensated executives are likely
to perceive that they are receiving less than they deserve in relation to their referent team
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 5
members and subsequently seek to restore equity by seeking employment elsewhere.
Furthermore, dispersed pay promotes “disruptive political activity” (Finkelstein et al., 2009:
356) and engenders conflict (Bloom & Michel; Cyert & March, 1963) while also decreasing
trust (Whyte, 1955) and increasing competition (Lambert et al., 1993; Lazear, 1989), each of
which can have implications for increasing turnover within the CEO’s top team. As a result,
a more dispersed pay structure within the CEO’s top team is associated with higher turnover
within the CEO’s top team.
Hypothesis 1: Pay dispersion within the CEO’s top team is positively related to turnover within the
CEO’s top team.
Compensation structures also result in internal, vertical comparisons such that executives
within a CEO’s top team compare their pay against the CEO. Tournament theory suggests
that when individuals receive compensation below a referent at the next highest hierarchical
level, they will be incentivized to put forth more effort in an attempt to be promoted and
secure the reward of higher compensation. Indeed, a high level of pay disparity with respect
to a vertical referent is indicative of forward-looking aspirations of future advancement
across hierarchical levels (the compensation premium possible through promotion from the
CEO’s top team to the CEO position). This creates a meritocracy in which reward for effort
increases substantially as individuals win successive rounds of the occupational tournament
(Heneman, 1992; Lambert et al., 1993; Zenger, 1992). That is, as pay across hierarchical
levels increases, individuals are expected to provide additional and sustained effort to “out-
perform” their peers in hopes of winning the occupational tournament (Lazear, 1995). The
incentives to both elicit and sustain effort are particularly relevant to executives at the CEO’s
top-team level for three reasons (Bloom & Michel, 2002; Lambert et al.; Lazear). First,
executives are highly achievement oriented and status driven. As such, these individuals are
more likely to respond to incentives for advancement by providing additional effort neces-
sary to reach the next level of achievement (to advance to the CEO position) and higher sta-
tus than are those individuals who lack these characteristics. Second, executives who are
members of the CEO’s top team have won previous tournaments to advance to the second
highest level in the tournament. As such, their previous success will likely influence them to
remain in the tournament and attempt to “win” it (i.e., be promoted to CEO). Third, the
incentives associated with “winning” the tournament are particularly strong at the CEO’s
top-team level because higher degrees of pay disparity exist as individuals move up to higher
levels within the organization (Lambert et al.). That is, the effects of pay disparity are par-
ticularly strong at the CEO’s top-team level because the reward for advancement increases
dramatically as individuals advance to higher levels. For example, advancement from an
entry-level job to supervisory management may coincide with a 5% to 10% pay increase,
whereas advancement to the CEO position from the CEO’s top team typically coincides with
a 60% increase in pay (Chatterjee & Hambrick, 2007). By matter of consequence, to win the
tournament and achieve the rewards associated with advancement to the next hierarchical
level, executives in the CEO’s top team must remain in the tournament. Cumulatively, then,
pay disparity will minimize the amount of turnover within the CEO’s top team.
Hypothesis 2: CEO’s top-team pay disparity is negatively related to turnover within the CEO’s top
team.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
6 Journal of Management / Month XXXX
Dual Effects of Pay Disparity and Pay Dispersion
Studies of pay structure typically emphasize only one aspect of a firm’s pay structure (e.g.,
Bloom, 1999; Bloom & Michel, 2002; Klaas & McClendon, 2006) in lieu of considering the
possibility that unique or even interactive effects exist between the different components.
Yet, because pay disparity and pay dispersion are both essential characteristics of a firm’s pay
structure and are driven by comparisons of different referents, it is important to consider
them simultaneously in order to determine their effects on turnover in the CEO’s top team.
While pay dispersion creates within-group comparisons and feelings of inequity, these
feelings may be minimized by the potential to reap higher rewards. That is, although indi-
viduals may resent unequal pay dispersions, the strength of this resentment may be mitigated
when the individual has an opportunity to gain greater compensation, status, and prestige that
comes with a promotion. Along these lines, tournament theory would suggest that pay dispar-
ity would minimize the negative effects of pay dispersion because a large pay disparity con-
fers not only potential compensation gains but also greater prestige and status (Frank, 1985).
As such, we expect that when a firm’s pay structure has a greater tournament structure—evi-
denced by greater pay disparity—the effects of pay dispersion on turnover will be mini-
mized. Therefore, we hypothesize the following:
Hypothesis 3: The relationship between pay dispersion within the CEO’s top team and turnover
within the CEO’s top team will be moderated by CEO’s top-team pay disparity such that the
positive relationship between pay dispersion and turnover within the CEO’s top team is weaker
as pay disparity increases.
Moderating Effects of Firm Pay Level Relative to the Market
The compensation structure of a firm not only pertains to differences within and across
hierarchical levels of the organization but must also address pay in relation to its competition.
A firm’s pay level demonstrates its average compensation in relation to that of competing
organizations (Brown et al., 2003; Gerhart & Milkovich, 1992) and can be characterized as
leading, matching, or lagging relative to the market. Leading the market refers to offering
higher-than-average compensation compared to competing organizations, while lagging the
market signifies lower-than-average compensation, and matching the market indicates com-
pensation at the average level of competitors. Pay level relative to the market is particularly
relevant in the context of executive turnover since individuals’ decision to remain or exit the
firm in response to pay disparity and pay dispersion may be affected by what reasonable
alternatives exist for them. For instance, it is reasonable to expect that individuals will not
“cut off their noses to spite their faces” and leave the organization if they take a pay cut in
doing so. In contrast, individuals with higher levels of pay may be more attractive to other
firms as a result of their higher prestige and status (Barnard, 1938; Marris, 1964; Merton,
1968). Indeed, prior research provides evidence that relative pay level moderates the rela-
tionship between pay dispersion and executive turnover (Messersmith et al., 2011).
The relationship between pay disparity and turnover in the CEO’s top team may also be
affected by pay level relative to the market. This can be expected for two reasons. First, tour-
nament theory suggests that pay disparity creates incentives for members of the CEO’s top
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 7
team to remain in the firm due to their desire to achieve greater compensation. However, this
incentive effect may weaken if the executives already earn greater remuneration than the rest
of the market. As Finkelstein and colleagues state, “Compensation may have its greatest
motivational impact as a symbolic reward” (2009: 345), and it will be less motivational when
pay is already high. Therefore, the incentive to remain in the firm and achieve promotion to
the next level is weaker because the executive is already well paid. Second, higher compen-
sation relative to competitors attracts the highest performing employees to the firm (Akerlof
& Yellen, 1986). That is, a higher level of pay relative to competing firms makes the firm
more attractive to those individuals who have the most ability and status. Consequently,
firms with high compensation levels relative to their competitors should be employing highly
qualified executives with increasing mobility in the labor market. For instance, Finkelstein
and colleagues suggest that “underpaid” executives “may not find the managerial labor mar-
ket particularly welcoming” (345), suggesting that higher-paid executives may have more
value in the labor market, thus increasing both their mobility and their possible exodus from
their current firms. Similarly, scholars find that higher-status individuals are viewed more
favorably by others and, as a result, are likely to be selected over lower-status individuals
who may actually be more deserving (Washington & Zajac, 2005). Taken together, the mini-
mization of incentives due to high remuneration as well as the increased mobility of highly
paid executives in the managerial labor market will minimize the retention effect created
through pay disparity.
Hypothesis 4: The relationship between CEO’s top-team pay disparity and turnover within the
CEO’s top team will be moderated by the firm’s pay level relative to the market such that the
negative relationship between CEO’s top-team pay disparity and turnover within the CEO’s top
team is weaker as pay level relative to the market increases.
Method
Sample
We tested our hypotheses on data collected for firms in the Standard & Poor’s 500 from
1994 through 2008 where complete data were available for each of the members of the
CEO’s top team in Execucomp. We treat within-hierarchical level as the four highest-paid
non-CEO executives and use the CEO as a vertical referent (Fredrickson et al., 2010; Siegel
& Hambrick, 2005). We obtained compensation and ownership data from the Execucomp
database and also collected a variety of control variables from Execucomp and Compustat.
All independent and control variables were lagged 1 year (time t – 1) while our dependent
variable was assessed in the focal year (time t). Due to the lag structure of the analysis and
missing data, our final sample was 350 total firms with an average number of observations
per firm of just under 11.0, culminating in 3,736 firm-year observations. Our sample pro-
vides generalizability across a range of industries and, therefore, may help alleviate some
limitations of particularistic samples that have been used to study pay differentials in the
past, such as Major League Baseball (Bloom, 1999), professional car racing (Becker &
Huselid, 1992), golf tournaments (Ehrenberg & Bognanno, 1990), hospitals (Brown et al.,
2003), university faculty (Pfeffer & Langton, 1993), and other single industry settings (Siegel
& Hambrick).
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
8 Journal of Management / Month XXXX
Measures
Dependent variables. The hypotheses developed in this article are concerned with execu-
tives exiting the CEO’s top team. As such, we calculated turnover in two different ways.
First, we created a count variable that indicates the number of executives that left the CEO’s
top team in the following year. Second, we created a binary variable that indicated 1 if any
member of the CEO’s top team left in the following year and 0 otherwise. We utilized four
different criteria to assess turnover of executives in the CEOs’ top teams. First, we utilized
data from Execucomp that identified the date that an executive left a focal firm. This is a
concrete report of a turnover event. This procedure allowed us to identify the turnover for
about one fourth of the executives listed in Execucomp for whom turnover dates are reported.
Second, we tracked executives for 3-year periods both pre- and postexit from the CEOs’ top
teams. That is, we identified a turnover when an individual was on the CEO’s top team for a
3-year period but then was not on the CEO’s top team for a subsequent 3-year period. Third,
using executives’ unique identifiers in Execucomp, we identified a turnover event when an
executive appeared in a different firm in consecutive years (e.g., in firm A in year t and in
firm B in year t + 1). Finally, we researched the biographies provided online by sources
such as Equilar Atlas, Forbes, and Notable Names Database to identify turnover events for
the remaining executives in our population. Using these four procedures, we were able to
identify 3,736 firm-year observations across 350 firms where we could track the number of
executives of CEOs’ top teams leaving their firms.
Independent variables. In operationalizing our pay structure constructs, we incorporated
both short-term and long-term compensation. Short-term compensation included salary
and bonus, while long-term compensation was calculated as the sum of restricted stock,
stock options, and long-term accounting-based incentive plans calculated on the basis of
the Black-Scholes present value method computed in Execucomp (Conyon, Peck, & Sadler,
2001; Fredrickson et al., 2010; Siegel & Hambrick, 2005). Following Siegel and Hambrick,
we defined each top-team member’s pay as the sum of short-term and long-term compensa-
tion because the exclusion of long-term components of compensation would considerably
understate the remuneration provided to each individual (Lambert et al., 1993). To compute
our pay dispersion variable, we followed the suggestion by Allison (1978) and used the coef-
ficient of variation, a measure often utilized by compensation researchers to measure pay
dispersion (e.g., Fredrickson et al.; Pfeffer & Langton, 1993; Siegel & Hambrick). Thus, pay
dispersion was calculated by dividing the standard deviation of the CEO’s top-team com-
pensation by the mean compensation of the CEO’s top team. Our measure of pay disparity
also followed previous work on executive pay structure and was calculated as the log of the
difference between the total pay of the CEO and the average total pay of the CEO’s top team
(Henderson & Fredrickson, 2001).1 Finally, consistent with the definition of pay level as a
firm’s average compensation relative to that of relevant competing organizations (Brown et
al., 2003; Gerhart & Milkovich, 1992), we measured pay level by subtracting the average
compensation of all members of the CEO’s top team for all sample firms in the focal firm’s
two-digit Standard Industrial Classification code from the average compensation of all mem-
bers of the CEO’s top team in the focal firm. Thus, positive values signified pay levels that
were above market average, and negative values signified pay levels that were lagging the
market (Brown et al.).2
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 9
Control variables. We controlled for a number of aspects of the environment, the firm,
and the CEO’s top team that have been shown to have effects on firm and CEO top-team
level outcomes. First, industries are known to have different norms regarding executive pay
(Finkelstein & Hambrick, 1989). To control for industry pay norms, we included a measure
of industry pay dispersion that was calculated as the average level of top-team pay dispersion
within the focal firm’s primary industry (defined as the firm’s two-digit Standard Industrial
Classification code; Fredrickson et al., 2010). In the same vein, we also included industry pay
disparity calculated as the average level of pay disparity in the focal firm’s primary industry.
We also controlled for both environmental munificence and complexity because of their
possible influence on turnover (Wiersema & Bantel, 2006). Since munificence captures the
extent to which the industry can sustain growth, we utilized industry sales growth to reflect
our measure of environmental munificence, which captures abundance in terms of opportuni-
ties for market expansion (Wiersema & Bantel). Environmental complexity was calculated by
dividing the combined sales of the four largest firms in Compustat (ranked by sales) within
each industry by the total sales of that industry (Palmer & Wiseman, 1999).
Firm-level controls that are included consist of firm size measured as the logarithm of the
firm’s total assets. Also at the firm level, capital investment activity (annual capital equip-
ment expenditures divided by sales) has been shown to influence executive pay gap effects
(Henderson & Fredrickson, 2001) and is included in the analysis. Scholars also suggest that
top executives may be effectively running autonomous businesses in highly diversified com-
panies (Hill, Hitt, & Hoskisson, 1992; Michel & Hambrick, 1992), which could influence
cooperation within the team and the effects of pay dispersion and disparity (Henderson &
Fredrickson). Therefore, diversification level was included and measured with the entropy
measure for total diversification (Palepu, 1985), such that diversification = Σ Pia ln(1/Pia),
where Pia is the proportion of a firm’s sales in business segment i. Finally, because firms also
have a say in executive departure (i.e., low-performing firms desiring to change manage-
ment), firm performance was included as the firm’s return on equity.
A final set of control variables was added to control for executive-level effects. Particularly,
we include several power and governance variables that might affect the compensation struc-
ture of a firm. For example, as CEOs are employed within a firm for a greater duration of
time, they may be more able to influence the firm’s compensation structure; as such, CEO
tenure was included and measured as the number of years since the CEO took office. We also
included a control for CEO top-team age, which we calculated as the average age of mem-
bers of the CEO’s top team. Additionally, since our theoretical arguments are rooted in tour-
nament theory, we included a dichotomous variable for CEO change coded as 1 in the
instance of the entrance of a new CEO and 0 otherwise. This is important because any year
that a new CEO takes the helm of a firm could be considered to be the restarting of the occu-
pational tournament in which members of the CEO’s top team are competing. As such, this
may influence the willingness of executives to remain in the tournament. Relatedly, we con-
trolled for whether the new CEO was promoted from within the CEO’s top team, since the
promotion of an insider may affect whether members of the CEO’s top team who were not
promoted wish to remain in the firm. We measured insider promotion with a value of 1 if the
CEO succession was from within the CEO’s top team and 0 otherwise. We also included a
control for new members of the CEO’s top team. This variable is the proportion of new mem-
bers of the CEO’s top team and was included because the entrance of new members may
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
10 Journal of Management / Month XXXX
influence the propensity for incumbent executives to exit the team as well as minimize the
overall propensity of the newly appointed members to leave. Finally, the presence of an
executive in the CEO’s top team who is believed to be a designated successor may affect the
propensity of other executives to exit the firm as they view their likelihood of promotion to
be limited (Ridge, Aime, & White, 2014). Thus, we include a control for the existence of an
heir apparent, which we measure with a binary variable equal to 1 only if (1) a member of the
CEO’s top team other than the CEO holds the title of president, COO, or president and COO;
and (2) that individual is more than 4 years younger than the CEO (Hambrick & Cannella,
2004).
Analysis and Results
Because we operationalized our dependent variable of top-team turnover in two ways, we
have separate analyses. First, when operationalizing top-team turnover as a count variable,
we used zero-inflated negative binomial regression with firm fixed effects, a technique
designed for analyses of noncontinuous, count-dependent variables with overdispersion—
when the variance of the underlying distribution is greater than the mean (Wooldridge, 2001).
Because many observations of our dependent variable do not deviate from 0, we were con-
cerned with bias and employed a zero-inflated negative binomial model to address this con-
cern. Second, when operationalizing our dependent variable as dichotomous, we employed
conditional fixed effects logistic regression models. In all models, the variance inflation fac-
tors were below the point of concern for collinearity (Hair, Black, Babin, Anderson, &
Tatham, 2006).
Descriptive statistics and correlations are presented in Table 1, while Table 2 provides
results of the negative binomial model, and Table 3 provides the results of the logistic regres-
sion. Model 1 in both Tables 2 and 3 includes control variables only. We added pay disparity
and pay dispersion simultaneously in Model 2 to test Hypotheses 2 and 3, while we added the
interaction terms in Model 3. Each of the models is significant in predicting top-team turn-
over over the control model (p < .001).
We find support for our behavioral prediction in Hypothesis 1, which argues that pay dis-
persion is positively related to turnover among members of the CEO’s top team. Support for
Hypothesis 1 is evidenced by the positive and significant (p < .001) effect for pay dispersion
in Model 2 of both Tables 2 and 3, which suggests that as pay dispersion within the CEO’s
top team increases, there is a higher likelihood of turnover. Similarly, we find support for our
tournament theory prediction in Hypothesis 2, which posits that pay disparity negatively
relates to turnover among members of the CEO’s top team. The effect of pay disparity on
top-team turnover is negative and significant (p < .001) in Model 2 of Table 2 and negative
and significant (p < .05) in Model 2 of Table 3. This indicates that as the gap in pay across
the CEO and top-team levels increases, there is a lower likelihood of turnover within the
CEO’s top team.
Model 3 tests the weakening effects of pay disparity on the relationship between pay dis-
persion and top-team turnover that was posited in Hypothesis 3. The interaction term pro-
vided significant and weakening moderating effects of pay disparity on the positive direct
effect of pay dispersion on top-team turnover (p < .05) in both Tables 2 and 3, providing
support for Hypothesis 3. This finding indicates that higher levels of pay disparity weaken
the positive effect of pay dispersion on top-team turnover such that while higher pay
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
11
Table 1
Correlations and Descriptive Statistics
Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 M SD
1. Turnover (count) 1.04 1.12
2. Turnover (binary) .71 0.63 0.48
3. Pay dispersion .12 .13 0.39 0.26
4. Pay disparity .09 .06 .13 7.93 1.22
5. Pay level .05 .03 .18 .44 1.10 2.95
6. CEO change .09 .12 .15 .00 .03 0.07 0.26
7. Insider promotion .06 .07 .09 .07 .00 .44 0.01 0.12
8. CEO tenure −.05 −.06 .01 −.01 .04 −.28 −.12 6.93 6.93
9. Firm performance .02 .00 .03 .04 .01 .04 .07 −.02 0.17 0.46
10. Firm size .13 .07 .02 .41 .34 .01 −.01 −.07 .01 8.82 1.33
11. Diversification level .04 .05 .02 .19 .13 .01 −.01 −.07 −.02 .33 0.63 0.64
12. Environmental complexity .08 .06 .01 .13 .04 .00 −.01 −.03 .03 −.02 .19 0.64 0.25
13. CEO’s top-team age .04 .05 .01 −.01 −.01 .12 .02 −.02 .01 .20 .16 .08 51.78 4.98
14. Heir apparent .00 .00 .10 .00 .06 −.09 −.03 .31 .00 −.02 −.04 .02 −.05 0.17 0.38
15. Environmental munificence −.06 −.03 .00 −.05 .01 −.04 −.02 .06 .01 −.10 −.04 −.04 −.03 .01 1.13 0.20
16. Capital investment −.02 −.04 −.01 −.07 −.02 −.02 −.03 .09 −.03 −.05 −.12 −.29 −.08 .00 .04 0.09 0.14
17. New CEO’s top-team members .07 .10 .12 .06 .05 .24 .09 −.20 −.02 .07 .07 .06 −.10 −.09 −.01 −.04 0.21 0.20
18. Industry pay disparity .18 .07 .08 .47 .12 .01 .03 −.05 .03 .34 .13 .11 .02 −.07 −.01 −.09 .07 7.23 0.55
19. Industry pay dispersion −.03 .02 .26 .09 .11 .03 .01 .07 .03 −.06 −.07 .05 −.09 .05 .04 −.03 .04 .18 0.41 0.07
Note: N = 3,736 firm-year observations. Correlations greater than .03 are significant at the .05 level.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
12 Journal of Management / Month XXXX
dispersion is associated with a higher likelihood of individuals leaving the CEO’s top team,
higher levels of pay disparity weaken this effect so that it is less positive. The results of the
logistic regression analysis are depicted in Figure 1. Hypothesis 4 is also tested in Model 3,
which assesses the moderating effect of pay level on the relationships between pay disparity
and top-team turnover. We find a significant moderating effect of pay level on pay disparity
in both Table 2 (p < .01) and Table 3 (p < .05) that is in the hypothesized direction, providing
support for Hypothesis 4. The results of the logistic regression analysis are depicted in Figure
2. The figure shows that pay level weakens the negative relationship between pay disparity
and turnover so that the relationship between the two is flat at high pay levels but signifi-
cantly negative at low pay levels. It is interesting to note that the mean level of turnover is
higher for higher paying firms because executives from those firms are attractive prospects
for hiring in the executive marketplace. This insight is consistent with the executive selection
literature. For example, Finkelstein and colleagues note that executives that are paid less than
peers may have a more difficult time in the labor market (2009), which suggests that higher
paid executives may have more value in the labor market, thus increasing both their mobility
Table 2
Effects of Compensation Structure of the CEO’s Top Team on Executive Turnover,
Negative Binomial Regression
Measure Model 1 Model 2 Model 3
Constant −6.38*** (0.56) −9.85*** (0.59) −6.70*** (0.56)
Environmental munificence −0.19† (0.10) −0.20† (0.10) −0.18† (0.10)
Environmental complexity 0.83** (0.27) 1.26*** (0.28) 0.86** (0.27)
Industry pay disparity 0.43*** (0.05) 0.830*** (0.06) 0.50*** (0.06)
Industry pay dispersion −0.75* (0.32) −1.39*** (0.33) −1.07*** (0.32)
CEO change 0.27*** (0.07) 0.24** (0.07) 0.22** (0.07)
Insider promotion −0.03 (0.13) 0.01 (0.13) 0.01 (0.13)
CEO tenure 0.01 (0.00) 0.01 (0.00) 0.01 (0.00)
CEO top-team age 0.02*** (0.01) 0.02*** (0.01) 0.02*** (0.01)
Heir apparent 0.18*** (0.06) 0.21*** (0.06) 0.17** (0.05)
Firm performance 0.04 (0.03) 0.03 (0.03) 0.03 (0.03)
Firm size 0.26*** (0.04) 0.44*** (0.05) 0.30*** (0.04)
Capital investment 0.57* (0.25) 0.71** (0.25) 0.52* (0.25)
Diversification level −0.08* (0.03) −0.14*** (0.04) −0.09** (0.03)
New CEO’s top-team members −0.20* (0.09) −0.25** (0.09) −0.23** (0.09)
Pay level −0.01 (0.01) −0.01 (0.01) −0.04** (0.01)
Pay dispersion 0.42*** (0.08) 0.44*** (0.08)
Pay disparity −0.16*** (0.02) −0.07** (0.02)
Pay Disparity × Pay Dispersion −0.09* (0.05)
Pay Disparity × Pay Level 0.02** (0.01)
χ2693.71*** 619.68*** 741.92***
Note: N = 3,736. Standard errors are shown in parentheses.
p < .10.
*p < .05.
**p < .01.
***p < .001.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 13
and their possible exodus from their current firms. Similarly, scholars find that higher-status
individuals are viewed more favorably by others and, as a result, are likely to be selected over
lower-status individuals who may actually be more deserving (Washington & Zajac, 2005).
Executive pay and executive roles in higher paying and prestigious organizations act as cer-
tification in the market for executives, increasing their mobility.
In supplementary analysis, we explored whether a more economic view of pay dispersion
might provide alternative explanations for Hypothesis 3. For example, utilizing tournament
theory suggests that pay disparity is similar to a proxy for rents of each “contestant” in the
occupational tournament if they were to be internally promoted. Similarly, from an economic
perspective, pay dispersion may be a proxy for the probability of promotion. That is, firms
with low pay dispersion induce all members of the CEO’s top team to perceive similar prob-
abilities for promotion. In higher pay dispersion firms, on the other hand, probabilities of
promotion are higher for those at higher levels of compensation and lower for those at lower
levels in the compensation structure. As such, if pay dispersion has a more economic (rather
than social comparison) effect, then compensation and/or pay dispersion should be related to
insider promotion. Within our sample, we proceeded to test whether prior pay and pay
Table 3
Effects of Compensation Structure of the CEO’s Top Team on Executive Turnover,
Fixed Effects Logistic Regression
Constant Model 1 Model 2 Model 3
Environmental munificence −0.03 (0.19) −0.03 (0.20) −0.05 (0.20)
Environmental complexity 0.85 (0.57) 0.98† (0.58) 1.04† (0.58)
Industry pay disparity 0.18 (0.11) 0.27* (0.12) 0.24* (0.12)
Industry pay dispersion 1.47* (0.68) 0.57 (0.70) 0.45 (0.71)
CEO change 0.98*** (0.20) 0.85*** (0.20) 0.84*** (0.20)
Insider promotion 0.46 (0.49) 0.47 (0.50) 0.44 (0.49)
CEO tenure 0.01 (0.01) 0.01 (0.01) 0.01 (0.01)
CEO’s top-team age 0.05*** (0.01) 0.05*** (0.01) 0.05*** (0.01)
Heir apparent 0.37** (0.12) 0.29* (0.12) 0.30* (0.12)
Firm performance −0.04 (0.09) −0.05 (0.10) −0.04 (0.10)
Firm size 0.34*** (0.09) 0.42*** (0.09) 0.43*** (0.09)
Capital investment 0.54 (0.55) 0.41 (0.55) 0.36 (0.56)
Diversification level −0.08 (0.11) −0.09 (0.11) −0.09 (0.11)
New CEO’s top-team members −0.06 (0.19) −0.21 (0.20) −0.21 (0.20)
Pay level −0.02 (0.02) −0.03 (0.02) −0.10** (0.03)
Pay dispersion 1.46*** (0.20) 1.60*** (0.20)
Pay disparity −0.12* (0.05) −0.09† (0.05)
Pay Disparity × Pay Dispersion −0.25* (0.12)
Pay Disparity × Pay Level 0.03* (0.01)
χ2144.18*** 208.95*** 217.72***
Note: N = 3,736. Standard errors are shown in parentheses.
p < .10.
*p < .05.
**p < .01.
***p < .001.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
14 Journal of Management / Month XXXX
dispersion help explain promotion to the CEO position. Our sample contained 278 firm-year
observations in which there was a change in CEO, 56 of which were insider promotions.
Using these 56 events across 224 potential successors from the individuals in CEOs’ top
teams, we ran a logistic regression to determine the relationship of previous pay, pay disper-
sion, and their interaction with promotion, a variable that took on a value of 1 for the indi-
vidual who becomes CEO and 0 for other members of the CEO’s top team. All three
coefficients are not significant (p = .858 for executive pay, p = −.281 for pay dispersion, and
p = .254 for the interaction term) and allow us to rule out any alternative economic explana-
tion and reinforce the social comparison explanation. As a further test of our theoretical
grounding, we tested a three-way interaction between pay disparity, pay dispersion, and pay
level. The results of the three-way interaction were nonsignificant.
Figure 1
Interaction Effects of Pay Disparity and Pay Dispersion
0.36
0.41
0.46
0.51
0.56
0.61
0.66
0.71
0.76
0.81
0.86
0.135 0.645
Probability of Turnover
Low Pay
Disparity
High Pay
Disparity
0.39
Pay Dispersion
Figure 2
Interaction Effects of Pay Disparity and Pay Level
0.2
0.25
0.3
0.35
0.4
0.45
6.71 9.15
Probability of Turnover
Low Pay Level
Relative to Market
High Pay Level
Relative to Market
7.93
Pay Disparity
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 15
Discussion
This article reports the findings from a study of compensation structures within CEOs’ top
teams in which we investigated the direct and interactive effects of pay arrangements relative
to three alternative referents for pay comparison identified in the extant literature (internal
horizontal comparisons within CEOs’ top teams, external horizontal comparisons with CEOs’
top teams in other firms in their industry, and internal vertical comparisons between the
CEO’s top-team pay and the CEO’s pay) on turnover within the CEO’s top team. In particu-
lar, the aim was to integrate our understanding of the ways in which compensation arrange-
ments and the existence of multiple referents to which CEOs’ top-team members might
compare their compensation influence behavior. We find that pay dispersion, pay disparity,
and pay level relative to market interact. This suggests that insights from social comparison
perspectives (Bloom, 1999; Bloom & Michel, 2002; Crosby, 1976; Siegel & Hambrick,
2005), tournament theorizing (Lazear, 1989; Lazear & Rosen, 1981), and equity theorizing
(Frank, 1985; Messersmith et al., 2011) need to be brought together to understand how mul-
tiple pay referents affect individual responses to compensation structures.
By concurrently examining the components of compensation structure and the resulting
pay comparisons to the three referents cited above, this study helps our understanding of how
the independent and interdependent effects of compensation elements affect executive turn-
over. We find that pay dispersion within CEOs’ top teams positively relates to turnover, a
result consistent with social comparison approaches that suggest there may be feelings of
inequity associated with large differences in pay among members of the CEO’s top team
(e.g., Bloom, 1999; Siegel & Hambrick, 2005). Pay disparity between the CEO’s top-team
pay and the CEO’s pay also negatively relates to executive turnover in our study, a result
consistent with tournament theorizing, suggesting there is a motivational aspect in the attrac-
tiveness of large differences in pay between members of the CEO’s top team and the CEO
(e.g., Heneman, 1992; Lambert et al., 1993; Zenger, 1992). Similarly, a contribution of this
article is demonstrating the existence of interactive effects among pay arrangements that
coincide with compensation structures and the related comparisons to different referents. Pay
disparity between team members and the CEO weakens the positive effect of pay dispersion
on turnover within the CEO’s top team in our study. We also find that higher pay levels rela-
tive to the market weaken the pay disparity effect that minimizes turnover within the CEO’s
top team. These findings complement prior work showing the interactive effect of pay dis-
persion and pay level (Messersmith et al., 2011).
Overall, our findings paint a complex picture of the design of compensation strategies and
address issues of significant concern to organization and strategy theorists, such as key
employee mobility, that have significant effects on team organizing processes (Humphrey &
Aime, 2014) and have been found to affect organizational performance (Aime et al., 2010;
Chandler, Honig, & Wiklund, 2005). Attention in compensation design for a group of indi-
viduals at a given hierarchical level cannot rely only on the likely internal comparisons
between—in the case of this study—CEO’s top-team members; it must also consider market
values and vertical aspects (here, pay relative to CEO) to provide for a more optimal com-
pensation design and behavioral mechanism. This provides practical importance, suggesting
that when structuring compensation, firms must consider the tournament incentives that may
result from vertical pay disparities as well as the potential for internal and cross-firm com-
parison of similar positions. Through a greater consideration of each aspect of the firm’s
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
16 Journal of Management / Month XXXX
compensation structure, greater stability of employment may be created within executive
levels. Indeed, firms that seek to minimize within-group dispersion while creating greater
across-hierarchical level disparity may obtain the greatest amount of employment stability.
Our results suggest that firms should attempt to minimize feelings of deprivation created
through pay dispersion while also increasing tournament compensation between levels. By
doing so, executives will likely perceive themselves as more equitably paid while also likely
increasing their desire to leverage current employment experiences in an attempt to win their
current occupational tournament.
As with any study, the results must be considered in light of the possible limitations,
which subsequently offer avenues for future research. First, while one of the benefits of our
current study is the broad, longitudinal design, this also provides a limitation in determining
the specific reason for each executive exit and more nuanced drivers of executive turnover.
As Wiersema and Zhang note, for example, relying on “age at departure” can be “problem-
atic” since “age is not a direct indicator of the nature of his/her departure” (2011: 1168). Our
approach to turnover follows extant research (e.g., Cannella & Hambrick, 1993; Kesner &
Dalton, 1994; O’Reilly, Caldwell, & Barnett, 1989; Shen & Cannella, 2002; Wagner, Pfeffer,
& O’Reilly, 1984; Wiersema & Bantel, 2006) that has known limitations for addressing
retirement effects. We control for the age of CEO’s top-team members (which helps account
for possible retirements) and how recently a new CEO was appointed (which is known to
increase retirements and internal successions, theoretically reducing the pressures to retire).
Still, the difficulty of more directly assessing retirement processes is a consistent limitation
of research in this area. This provides avenues for future research into the specific reasons
why each executive exits and opens avenues for a more nuanced view of turnover.
Second, while we follow prior research in using the top four highest-paid non-CEO exec-
utives (e.g., Carpenter & Sanders, 2004; Fredrickson et al., 2010), such an approach assumes
that the CEOs’ top teams consist of a fixed number of individuals across firms. Like many
studies in the executive compensation literature, we utilize available data but note that the
difficulty in accessing compensation for other members of the CEO’s top team is a limitation.
Third, our research looks at only a single outcome—turnover—and additional research could
investigate other outcomes associated with compensation and the resulting comparisons.
Finally, our research assumes resource heterogeneity across members of CEOs’ top teams as
well as that bounded rationality, imperfect information, and social complexity for both the
employing firms and individual executives are at work. That is, the market for executives is
imperfect; evaluating the ability of, and subsequently compensating, individual executives is
difficult owing to the combinatory nature of executive work and particularly in light of exec-
utives’ heterogeneous resources and inability to leverage skills perfectly across firm settings.
Although this approach builds upon research within the management literature, these assump-
tions are contrary to assumptions of a more perfect market for talent and compensation.
The results of our study also suggest a number of other avenues for future research. For
example, our expanded understanding of multiple referents may be coarse in the sense that
individual and collective characteristics of executives may have different effects on the
response of executives to alternative referents. For instance, scholars argue that individual
psychological characteristics, such as self-confidence, and regulatory foci cause responses to
compensation arrangements (Hambrick, 2007; Wowak & Hambrick, 2010). However, little
research to date investigates these contentions. It is possible that how the top-team members
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 17
respond to different aspects of a firm’s pay structure is in part influenced by their psychologi-
cal traits or by the ability of different team members to reduce performance uncertainties
(Aime, Humphrey, DeRue, & Paul, in press), presenting an intriguing avenue for extending
this stream of research. An additional opportunity for future research is addressing contextual
factors that may influence the consequences of pay disparity and pay dispersion. For instance,
prior research argues that the need for coordination moderates the effects of pay disparity on
firm performance (Henderson & Fredrickson, 2001), and it is possible that other contextual
factors influence the strength of pay structure relationships. Last, pay structures may affect a
number of organizational phenomena, and scholars could expand this line of inquiry by
addressing how comparisons drawn to multiple referents work in concert to affect a wider
range of outcomes.
Conclusion
We explore how pay structures and the resulting multiple concurrent pay comparisons to
various referents affect turnover in the CEO’s top team. Drawing upon a longitudinal sample
across various industries, we build on tournament theory and social comparison perspectives
to extend our knowledge of how individuals respond to simultaneous comparisons of pay
dispersion within their hierarchical levels, pay disparity between the next hierarchical level,
and pay level in comparison to the market. The results of our study indicate that elements of
pay comparisons have unique and interactive effects that affect subsequent responses. Our
research extends theories related to compensation, particularly at the executive level, and
offers insight for practice. Specifically, our findings suggest that scholars and practitioners
must consider how pay dispersion, pay disparity, and pay level work in concert to affect
executive behaviors in response to such pay arrangements concurrently.
Notes
1. Pay disparity had a fraction of a percent of observations that fell outside of 3 SD from the mean. To ensure
these potentially influential values were not affecting our results, we reran our analyses while omitting these obser-
vations, finding that our results were analogous to those presented herein. Given the similarities, we retain the
potential outlier observations in our analyses (cf. McNamara, Aime, & Valler, 2005).
2. Firms in which compensation was below the market have a negative pay level, indicating lagging the market,
and, hence, a log of the value cannot be taken.
References
Adams, J. S. 1965. Inequity in social exchange. In L. Berkowtiz (Ed.), Advances in experimental social psychology:
267-299. New York: Academic Press.
Aime, F., Humphrey, S. E., DeRue, D. S., & Paul, J. in press. The riddle of heterarchy: Power transitions in cross-
functional teams. Academy of Management Journal. doi:10.5465/amj.2011.0756
Aime, F., Johnson, S., Ridge, J. W., & Hill, A. D. 2010. The routine may be stable but the advantage is not:
Competitive implications of key employee mobility. Strategic Management Journal, 31: 75-87.
Aime, F., Meyer, C. J., & Humphrey, S. E. 2010. Legitimacy of group rewards: Analyzing legitimacy as a condition
for the effectiveness of group incentive designs. Journal of Business Research, 63: 60-66.
Akerlof, G. A., & Yellen, J. L. 1986. Efficiency wage models of the labor market. Cambridge, England: Cambridge
University Press.
Allison, P. D. 1978. Measures of inequality. American Sociological Review, 43: 865-880.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
18 Journal of Management / Month XXXX
Andrews, I., & Henry, M. 1963. Management attitudes toward pay. Industrial Relations, 3: 29-39.
Barnard, C. I. 1938. The functions of the executive. Cambridge, MA: Harvard University Press.
Baron, J. N., & Pfeffer, J. 1994. The social psychology of organizations and inequality. Social Psychology Quarterly,
57: 190-209.
Becker, B. E., & Huselid, M. A. 1992. The incentive effects of tournament compensation systems. Administrative
Science Quarterly, 37: 336-350.
Bloom, M. 1999. The performance effects of pay dispersion on individuals and organizations. Academy of
Management Journal, 42: 25-40.
Bloom, M., & Michel, J. G. 2002. The relationships among organizational context, pay dispersion and managerial
turnover. Academy of Management Journal, 45: 33-42.
Brown, M. P., Sturman, M. C., & Simmering, M. J. 2003. Compensation policy and organizational performance: The
efficiency, operational, and financial implications of pay levels and pay structure. Academy of Management
Journal, 46: 752-762.
Cannella, A. A., Jr., & Hambrick, D. C. 1993. Effects of executive departures on the performance of acquired firms.
Strategic Management Journal, 14: 137-152.
Carpenter, M. A., & Sanders, W. 2002. Top management team compensation: The missing link between CEO pay
and firm performance? Strategic Management Journal, 23: 367-375.
Carpenter, M. A., & Sanders, W. G. 2004. The effects of top management team pay and firm internationalization on
MNC performance. Journal of Management, 30: 509-528.
Chandler, G. N., Honig, B., & Wiklund, J. 2005. Antecedents, moderators, and performance consequences of mem-
bership change in new venture teams. Journal of Business Venturing, 20: 705-725.
Chatterjee, A., & Hambrick, D. C. 2007. It’s all about me: Narcissistic chief executive officers and their effects on
company strategy and performance. Administrative Science Quarterly, 52: 351-386.
Conyon, M. J., Peck, S. I., & Sadler, G. V. 2001. Corporate tournaments and executive compensation: Evidence
from the UK. Strategic Management Journal, 22: 805-815.
Cowherd, D., & Levine, D. 1992. Product quality and pay equity between lower-level employees and top manage-
ment: An investigation of distributive justice theory. Administrative Science Quarterly, 37: 302-320.
Crosby, F. 1976. A model of egoistical relative deprivation. Psychological Review, 83: 85-113.
Cyert, R., & March, J. 1963. A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall.
Ehrenberg, R. G., & Bognanno, M. L. 1990. The incentive effects of tournaments revisited: Evidence from the
European PGA Tour. Industrial and Labor Relations Review, 43: 74-88.
Festinger, L. 1954. A theory of social comparison processes. Human Relations, 7: 117-140.
Finkelstein, S., & Hambrick, D. C. 1989. Chief executive compensation: A study of the intersection of markets and
political processes. Strategic Management Journal, 10: 121-134.
Finkelstein, S., Hambrick, D., & Cannella, B. 2009. Strategic leadership: Theory and research on executives, top
management teams, and boards. New York: Oxford University Press.
Frank, R. H. 1985. Choosing the right pond: Human behavior and the quest for status. New York: Oxford University
Press.
Fredrickson, J. W., Davis-Blake, A., & Sanders, W. 2010. Sharing the wealth: Social comparisons and pay disper-
sion in the CEO’s top team. Strategic Management Journal, 31: 1031-1053.
Gerhart, B., & Milkovich, G. T. 1992. Employee compensation: Research and practice. Mountain View, CA:
Consulting Psychologists Press.
Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. 2006. Multivariate data analysis (6th ed.).
Upper Saddle River, NJ: Pearson–Prentice Hall.
Hambrick, D. 1995. Fragmentation and the other problems CEOs have with their top management teams. California
Management Review, 37: 110-127.
Hambrick, D. C. 2007. Upper echelons theory: An update. Academy of Management Review, 32: 334-343.
Hambrick, D. C., & Cannella, A. A. 2004. CEOs who have COOs: Contingency analysis of an unexplored structural
form. Strategic Management Journal, 25: 959-979.
Henderson, A. D., & Fredrickson, J. W. 2001. Top management team coordination needs and the CEO pay gap: A
competitive test of economic and behavioral views. Academy of Management Journal, 44: 96-117.
Heneman, R. L. 1992. Merit pay: Linking pay increases to performance ratings. Boston: Addison-Wesley.
Hill, C. W. L., Hitt, M. A., & Hoskisson, R. E. 1992. Cooperative versus competitive structures in related and unre-
lated diversified firms. Organization Science, 3: 501-521.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
Ridge et al. / Multiple Concurrent Pay Comparison Referents 19
Hills, F. 1980. The relevant other in pay comparison. Industrial Relations, 19: 345-351.
Humphrey, S. E., & Aime, F. 2014. Team microdynamics: Toward an organizing approach to teamwork. Academy
of Management Annals, 8: 443-503.
Jordan, J. M. 2010. Salary and decision making: Relationship between pay and focus on financial profitability and
prosociality in an organizational context. Journal of Applied Social Psychology, 40: 402-420.
Kepes, S., Delery, J., & Gupta, N. 2009. Contingencies in the effects of pay range on organizational effectiveness.
Personnel Psychology, 62: 497-531.
Kesner, I. F., & Dalton, D. R. 1994. Top management turnover and CEO succession: An investigation of the effects
of turnover on performance. Journal of Management Studies, 31: 701-713.
Klaas, B. S., & McClendon, J. A. 2006. To lead, lag, or match: Estimating the financial impact of pay level policies.
Personnel Psychology, 49: 121-141.
Lambert, R. A., Larcker, D. F., & Weigelt, K. 1993. The structure of organizational incentives. Administrative
Science Quarterly, 38: 438-461.
Lazear, E. P. 1989. Pay equality and industrial politics. Journal of Political Economy, 97: 561-580.
Lazear, E. P. 1995. Personnel economics. Cambridge, MA: MIT Press.
Lazear, E., & Rosen, S. 1981. Rank-order tournaments as optimum labor contracts. Journal of Political Economy,
89: 841-864.
Main, B. G. M., O’Reilly, C. A., III, & Wade, J. 1993. Top executive pay: Tournament or teamwork? Journal of
Labor Economics, 11: 606-628.
March, J., & March, J. 1977. Almost random careers: The Wisconsin school superintendency, 1940-1972.
Administrative Science Quarterly, 22: 377-409.
Marris, R. 1964. The economic theory of managerial capitalism. New York: Free Press.
McNamara, G., Aime, F., & Valler, P. M. 2005. Is performance driven by industry- or firm-specific factors? A
response to Hawawini, Subramanian, and Verdin. Strategic Management Journal, 26: 1075-1081.
Merton, R. K. 1968. The Matthew effect in science: The reward and communication systems of science are consid-
ered. Science, 159: 56-63.
Messersmith, J. G., Guthrie, J. P., Ji, Y. Y., & Lee, J. Y. 2011. Executive turnover: The influence of dispersion and
other pay system characteristics. Journal of Applied Psychology, 96: 457-469.
Michel, J. G., & Hambrick, D. C. 1992. Diversification posture and top management team characteristics. Academy
of Management Journal, 35: 9-37.
O’Reilly, C., Caldwell, D., & Barnett, W. 1989. Work group demography, social integration and turnover.
Administrative Science Quarterly, 34: 21-37.
Palepu, K. 1985. Diversification strategy, profit performance and the entropy measure. Strategic Management
Journal, 6: 239-255.
Palmer, T. B., & Wiseman, R. M. 1999. Decoupling risk taking from income stream uncertainty: A holistic model
of risk. Strategic Management Journal, 20: 1037-1062.
Pfeffer, J., & Langton, N. 1993. The effect of wage dispersion on satisfaction, productivity, and working collabora-
tively: Evidence from college and university faculty. Administrative Science Quarterly, 38: 382-407.
Ridge, J. W., Aime, F., & White, M. A. 2014. When much more of a difference makes a difference: Social compari-
son and tournaments in top management teams. Strategic Management Journal. doi:10.1002/smj.2227
Shaw, J. D., Gupta, N., & Delery, J. E. 2002. Pay dispersion and workforce performance: Moderating effects of
incentives and interdependence. Strategic Management Journal, 23: 491-512.
Shen, W., & Cannella, A. A. 2002. Power dynamics within top management and their impacts on CEO dismissal
followed by insider succession. Academy of Management Journal, 34: 1195-1206.
Siegel, P. A., & Hambrick, D. C. 2005. Pay disparities within top management groups: Evidence of harmful effects
on performance of high-technology firms. Organization Science, 16: 259-274.
Wade, J. B., O’Reilly, C. A., & Pollock, T. G. 2006. Overpaid CEOs and underpaid managers: Fairness and execu-
tive compensation. Organization Science, 17: 527-544.
Wagner, W. G., Pfeffer, J., & O’Reilly, C. A. 1984. Organizational demography and turnover in top management
groups. Administrative Science Quarterly, 29: 74-92.
Washington, M., & Zajac, E. 2005. Status evolution and competition: Theory and evidence. Academy of Management
Journal, 48: 282-296.
Whyte, W. F. 1955. Money and motivation: An analysis of incentives in industry. New York: Harper.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
20 Journal of Management / Month XXXX
Wiersema, M. F., & Bantel, K. A. 2006. Top management team turnover as an adaptation mechanism: The role of
the environment. Strategic Management Journal, 14: 485-504.
Wiersema, M. F., & Zhang, Y. 2011. CEO dismissal: The role of investment analysts. Strategic Management
Journal, 32: 1161-1182.
Wooldridge, J. M. 2001. Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.
Wowak, A. J., & Hambrick, D. C. 2010. A model of person-pay interaction: How executives vary in their responses
to compensation arrangements. Strategic Management Journal, 31: 803-821.
Zenger, T. R. 1992. Why do employers only reward extreme performance? Examining the relationships among
performance, pay, and turnover. Administrative Science Quarterly, 37: 198-219.
at OKLAHOMA STATE UNIV on July 30, 2014jom.sagepub.comDownloaded from
  • Article
    In this study, we theorize that CEOs’ peer pay comparisons influence their decisions to engage in layoffs, and we consider the conditions under which layoffs deliver “payoffs” in the form of increases in subsequent CEO relative pay. Empirical results obtained using a unique dataset indicate that a CEO's relative pay in one year negatively relates to the likelihood of the CEO announcing layoffs in the subsequent year. Further, we find that the relationship between layoffs and subsequent changes in CEO relative pay depends on post‐layoff changes in firm performance, with CEOs in firms with the largest performance gains receiving the largest increases in relative pay. We also show that our results are robust to an alternative operationalization of CEO relative pay. We provide evidence that external social comparisons may have predictable consequences for both CEOs’ propensities to engage in particular strategic actions and future changes in CEOs’ relative pay. This article is protected by copyright. All rights reserved
  • Article
    Scholars have devoted considerable effort to exploring the causes of executive behavior, with the accumulated research spanning multiple social science disciplines. This variety is beneficial in that numerous theories and methodologies have been brought to bear on the topic, but over time has led to increasingly fragmented literatures that often differ widely in their causal accounts of executive behavior. Confronted by such fragmentation, scholars in this domain tend to examine research questions through the lens of a single motivational perspective when developing and testing models. We believe that a more holistic perspective on the drivers of executive behavior can help scholars build richer models that bridge disciplinary silos by reframing existing theories in a new light. We specifically aim to bring clarity to this domain by developing a parsimonious framework for understanding executive motives in terms of the nature of the rewards (pecuniary versus nonpecuniary) that motivate executive action and the motivational frame of reference (individualized versus socialized agency) for conceptualizing rewards. Using this bidimensional framework to synthesize research from the last decade, we outline a platform for research that conceptualizes executive motives as the lynchpin for understanding, integrating, and advancing theoretical perspectives on executive behavior.
  • Article
    Full-text available
    The article is aimed at working out a comprehensive perspective on sustainable incremental change in organizations from a practice-based approach. That perspective presents everyday routine organizational practices as loci of sustainable organizational change. The research conducted reveals sustainability aspects that influence incremental change in the product development cycle in textile and apparel enterprises. The short life cycle of textile and apparel products challenges the multiplicity of sustainability aspects in that industry. The sequential procedure of mixing quantitative and qualitative methods was applied. A quantitative study was followed by qualitative research that was aimed at gaining an idiographic perspective. The statistical procedure was applied to determine the associative relationships between sustainable dynamizing factors and practice variability in textile and apparel enterprises. The influence factors were further explored as part of in-depth qualitative research. The qualitative research referred to three main aspects of sustainable practices at the initial production stage (sustainable water use), the last stages of the textile and garment life cycle (disposal and recycling of unwanted materials), and value (co)creation in the apparel industry. The results put emphasis on spontaneous vs. purposive activities in sustainable practice.
  • Article
    Reseach Summary Integrating victimization into competitive dynamics and upper echelons theorizing, we develop and test theory articulating how rivals’ perceptions of a CEO precipitate attacks on the CEO's firm. Rather than treating CEOs’ characteristics solely as perpetrating action (a first‐order effect, like research integrating upper echelons into competitive dynamics), we argue firms with CEOs possessing characteristics perceived as more submissive or more provocative are subject to more competitive actions directed toward their firms (a second‐order effect, like victimization research). Empirical analyses of a sample of Fortune 500 CEOs supports our theorizing while interviews of executives corroborate our premise as well. Our framework offers a more complete and socialized understanding of CEOs’ roles in competitive dynamics, providing both theoretical and practical insights as well as future research avenues. Managerial Summary We articulate how CEOs possessing certain psychological, behavioral, and social characteristics may unknowingly precipitate competitive attacks on their firms. Our explanation integrates insights from victimology which explain how individuals are subject to more attacks if they possess characteristics others perceive as more submissive or more provocative. While prior research articulates that CEOs’ characteristics affect decisions such as attacking rivals, integrating theories of victimization into this line of inquiry paints a more socialized view of why firms may be subject to competitive attacks as well. The logic and evidence we provide advances theoretical explanations of firms’ competitive behaviors and executives’ roles therein. At the same time, providing knowledge about how CEO characteristics precipitate competitive actions toward their firms can aid in prevention and intervention strategies.
  • Article
    Full-text available
    We explore whether employees compare their pay to the pay of others in a similarly prestigious occupation and, if so, whether this comparison has a negative impact on pay satisfaction. Using an experimental vignette methodology, Study 1 found that people are more inclined to compare with others from a similar or identical occupation and that comparison negatively impacts pay satisfaction. This comparison and its negative effect is particularly strong in high-prestige occupations. Based on survey data, Study 2 also showed that the average pay of others in occupations of similar prestige is negatively correlated with employees' pay satisfaction. This negative correlation was also stronger in higher-prestige occupations. Our analysis highlights the importance of occupational prestige as a main factor influencing pay comparison.
  • Article
    Full-text available
    Much of the recent research on executive characteristics focuses on attributes that society tends to view negatively, such as self-interest, self-serving bias, and narcissism. While providing insights into how executives' impact organizational outcomes, there may be attributes more positively viewed by society present in top management teams (TMTs) that have been overlooked , specifically TMT modesty. Though modesty deviates from the conventional view of executives, evidence from social psychology suggests that modesty positively impacts career success and upward mobility, suggesting that at least some individuals that rise to the level of the TMT are more modest than previously expected. Building on this insight, we argue that TMT modesty both elicits positive investor reactions following earnings calls and corresponds with higher levels of firm performance.
  • Article
    Full-text available
    Much of the recent research on executive characteristics focuses on attributes that society tends to view negatively, such as self-interest, self-serving bias, and narcissism. While providing insights into how executives’ impact organizational outcomes, there may be attributes more positively viewed by society present in top management teams (TMTs) that have been overlooked, specifically TMT modesty. Though modesty deviates from the conventional view of executives, evidence from social psychology suggests that modesty positively impacts career success and upward mobility, suggesting that at least some individuals that rise to the level of the TMT are more modest than previously expected. Building on this insight, we argue that TMT modesty both elicits positive investor reactions following earnings calls and corresponds with higher levels of firm performance.
  • Thesis
    Full-text available
    This study investigates the relation between Americans' meritocracy beliefs and their evaluations of pay dispersion at three fictional American organizations. The current research draws on existing theories, including tournament theory and distributive justice theory, to investigate factors that affect people's evaluations of pay dispersion. 637 participants, recruited from Amazon's Mechanical Turk, completed two online surveys, and rated the degree to which they believed outcomes (e.g., jobs, rewards) were (and should have been) distributed based on merit. They also reported how they felt about various levels of pay dispersion. The results indicated that individuals rated high levels of pay dispersion less positively than low levels of pay dispersion. As well, more people perceived that meritocracy existed, the more positively they evaluated pay dispersion. This relation was mediated by people's perceptions of equity and their perceptions of whether pay dispersion benefited organizations. The implications for research and practice are discussed.
  • Article
    This book integrates and assesses the vast and rapidly growing literature on strategic leadership, which is the study of top executives and their effects on organizations. The basic premise is that, in order to understand why organizations do the things they do, or perform the way they do, we need to comprehend deeply the people at the top-their experiences, abilities, values, social connections, aspirations, and other human features. The actions-or inactions-of a relatively small number of key people at the apex of an organization can dramatically affect organizational outcomes. The scope of strategic leadership includes individual executives, especially chief executive officers (CEOs), groups of executives (top management teams, or TMTs), and governing bodies (particularly boards of directors). Accordingly, the book addresses an array of topics regarding CEOs (e.g., values, personality, motives, demography, succession, and compensation); TMTs (including composition, processes, and dynamics); and boards of directors (why boards look and behave the way they do, and the consequences of board profiles and behaviors). The book synthesizes what is known about strategic leadership and indicates new research directions.
  • Article
    The central premise of upper echelons theory is that executives' experiences, values, and personalities greatly influence their interpretations of the situations they face and, in turn, affect their choices. At the invitation of the editor, I recap the AMR article in which the theory was originally presented (Hambrick & Mason, 1984), discuss subsequent refinements of the theory, and lay out several promising avenues for future upper echelons research.
  • Article
    The need for coordinated decision making bears on the pay gap between a firm's CEO and its other top executives. A behavioral view suggests that because more equal pay promotes collaboration, greater coordination needs encourage smaller pay gaps, and the combination of greater needs and smaller gaps enhances firm performance, An economic view implies the opposite because larger gaps create tournament-like incentives that address monitoring problems associated with joint decisions. We found that although economic theory was a better predictor of the size of CEO pay gaps, there was a balance between the economic and behavioral views as predictors of firm performance.
  • Article
    In this study, we (1) clarify and distinguish the concept of status, (2) identify and analyze the institutional and organizational factors that can lead to differences in organizational status over time, and (3) empirically assess the privileges implied by such differences. Using extensive longitudinal data on competitive intercollegiate athletics, we found that status was a significant predictor of whether a college was invited to participate in the NCAA postseason basketball tournament, independently of performance considerations.
  • Article
    This study's argument is that a firm's diversification posture determines the degree of integration it needs across business units, which in turn influences the ideal composition of its corporate top management team. Archival data from 134 firms revealed that the degree of social cohesion and type of knowledge base within a firm's top management team were related to the degree of interdependence the firm's diversification posture demanded. Contrary to our hypotheses, experience in core functional areas among top team members was positively related to corporate performance in low-interdependence firms and negatively related to it in high-interdependence firms.