EXIT OR LOYALTY:
THE EFFECTS OF COMPENSATION ON CEO TURNOVER *
Maria Hasenhuttl
The University of Texas at Dallas
School of Management
P.O. Box 830688, Richardson TX 75083
Tel: (972) 883-6359
Fax: (972) 883-6521
e-mail: h1562@utdallas.edu
J. Richard Harrison
The University of Texas at Dallas
School of Management
P.O. Box 830688, Richardson TX 75083
Tel: (972) 883-2569
Fax: (972) 883-6521
e-mail: harrison@utdallas.edu
September 2002
* We appreciate the comments of Jim Walsh on an earlier version of this paper.
EXIT OR LOYALTY:
THE EFFECTS OF COMPENSATION ON CEO TURNOVER
Abstract
This study explores the relationship between chief executive officer (CEO) compensation and
CEO turnover using a sample of 1233 companies included in Standard & Poor’s ExecuComp
database in 1995. The results show that total CEO compensation has limited effects on CEO
turnover. For manufacturing firms, no compensation components are positively associated with
CEO retention, and restricted stock grants actually increase the likelihood of CEO turnover. For
non-manufacturing firms, only stock option grants promote CEO retention. The implications of
the findings for CEO compensation policy are discussed.
1
Exit or Loyalty: The Effects of Compensation on CEO Turnover
The corporate board of directors is responsible for overseeing management and
safeguarding shareholder interests. Two of the board’s most important strategic roles are
providing compensation – including incentive compensation – for the chief executive officer
(CEO) and assuring the financial viability of the firm. The strategic performance of the board has
frequently been questioned on the issue of CEO compensation. On April 12, 1997, the cover of
Business Week declared, “Executive Compensation: It’s Out of Control.” And the cover of the
April 3, 2000, issue of Forbes featured “The $100 Million CEO.”
In the wake of recent corporate debacles, broader concerns are now being raised about
the board’s role in executive compensation and fiscal oversight, with substantial emphasis on
stock options and grants. According to Morgenson (2002: C11), “...the scandals at Enron and
other corporations have alerted investors...to how severely stock option plans can dilute both
their stakes and their companies’ earnings.” A major concern – now being addressed by many
firms – is that options haven’t appeared as expenses on corporate financial statements but may
have substantial impact on the future financial health of the firm. This debate has significant
implications for corporate governance and strategy, and involves a wide range of issues.
In this paper, we address one of these issues: corporate justifications for the huge
compensation packages of CEOs, including stock options, based on the rationale that generous
compensation is necessary for their retention. (Another common rationale is that stock options, a
major component of CEO compensation, help to align CEO interests with those of shareholders.)
We break no new ground theoretically, merely restating the theoretical arguments for the
retention effects of compensation and its components. Instead, we focus on examining the
empirical evidence for this rationale.
2
If high levels of compensation are necessary for – or even influence – CEO retention,
then higher-compensated CEOs should be less likely to leave their firms. We test this idea with a
sample of 1233 American corporations during the mid-1990s. Our findings show that the
retention justification for high CEO compensation has limited merit, supported only by the effect
of stock options in non-manufacturing industries. The retention justification is supported by no
other compensation component, and restricted stock grants actually promote CEO turnover rather
than retention in manufacturing industries.
BACKGROUND
Recent academic studies of corporate justifications for high CEO compensation have
focused on the explanations provided by companies in their proxy statements. Partly in response
to criticisms of excessive compensation, the Securities and Exchange Commission (SEC)
adopted significantly modified proxy disclosure requirements for executive compensation in
October 1992 (see SEC Release No. 33-6940, 57 Federal Register 48126). The revised rules
require companies to disclose in their proxy statements all elements of top management’s
compensation in a standardized format. In addition, the compensation committee – the
committee of the board of directors composed primarily of independent outside directors and
responsible for setting executive compensation, sometimes subject to approval by the full board
(Elhagrasey et al., 1999) – is required to provide in the proxy a description of the rationale for
the reported compensation and its relationship to performance.
Zajac and Westphal (1995) studied the proxy justifications of Fortune 500 firms when
they adopted an executive long-term incentive plan (LTIP). They identified two rationales for
incentive compensation: an agency theory explanation (the alignment of managerial and
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shareholder interests) and a human resources (HR) explanation. The HR explanation focuses on
the ability to attract and retain scarce managerial talent as the main rationale for the particular
compensation given to the CEO (Gomez-Mejia and Welbourne, 1988). Zajac and Westphal
(1995) found that 51 percent of the 352 firms in their study used an HR explanation. An example
of an HR explanation is Lattice Semiconductor’s 2001 proxy assertion that “…total
compensation packages must be competitive with other companies in the industry to ensure that
Lattice can continue to attract, retain and motivate key employees … “(p. 5).
Wade et al. (1997) studied the justifications reported by the compensation committees of
266 Standard & Poor’s 500 firms. They identified three types of compensation justification:
external validation justifications (the use of compensation consultants and external surveys);
shareholder alignment justifications (equivalent to the agency theory explanation of Zajac and
Westphal, 1995); and performance justifications (pay for performance). But their classification
system did not explicitly identify retention justifications, which could fall into the external
justification or performance categories.
Stock options have been viewed as a particularly potent retention mechanism, since they
usually don’t vest for three or four years after they are granted, and CEOs lose their unvested
options when they leave the company. Stock options have represented an increasing proportion
of total compensation in the 1990s (Anderson et al., 2000).
The effectiveness of compensation as a retention mechanism for talented CEOs is
questionable. High compensation can serve as a signal that the CEO is outstanding, and other
firms attempting to lure the CEO away can match or exceed the CEO’s current compensation. In
addition, they can offer equivalent value for the restricted stock and stock options that the CEO
would forfeit when changing firms. When the CEO is compensated for such forfeitures, it is said
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that the CEO is “made whole,” a frequently reported phenomenon (Lublin, 1998). This is
illustrated in National Semiconductor’s 1999 proxy statement: “The compensation package made
available to Mr. Halla was heavily weighted in stock and stock options…to compensate him for
the significant value in unvested stock options granted by his prior employer forfeited by him in
order to join the company.”
Does high compensation really enhance CEO loyalty? Only one study, Coughlan and
Schmidt (1985), included compensation in an investigation of executive turnover. However,
Coughlan and Schmidt (1985) did not directly measure compensation, and their model is
underspecified (it includes only age and performance in addition to compensation). There is a
vast amount of literature on executive turnover (for reviews, see Furtado and Karan, 1990;
Kesner and Sebora, 1994; Finkelstein and Hambrick, 1996; Pitcher et al., 2000). However,
according to Finkelstein and Hambrick (1996), the relationship between executive compensation
and turnover has not been subjected to rigorous empirical examination. Given the emphasis on
retention as a justification for high CEO compensation, we find this quite surprising. Redressing
this gap in the literature is the purpose of this paper.
THEORY AND HYPOTHESES
Social comparison theory posits that individuals evaluate their situations through
comparison with similar others (Festinger, 1954; Kulik & Ambrose, 1992). O’Reilly et al.
(1988), applying this theory to the CEO compensation-setting process, focus on other CEOs as
the relevant comparison group.
Social comparison is the foundation of equity theory (Adams, 1963, 1965), which argues
that low relative compensation decreases perceived equity, causes dissatisfaction and
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subsequently leads to efforts to restore equity. Pay inequity has been shown to increase the
likelihood of turnover (Levine, 1993; Telly et al., 1971). Research on lower level employees has
found a modestly significant relationship between the perceived fairness of compensation (equity
of rewards) and turnover (Hom & Griffeth, 1995). Cotton and Tuttle (1986), in a meta-analysis
of turnover research, found strong support for a negative relationship between pay, pay
satisfaction and turnover, indicating that dissatisfaction with pay leads to turnover.
Finkelstein and Hambrick (1996) applied equity theory to executive compensation. They
argued that for CEOs, pay has a strong symbolic value and is “a primary scorecard for
managerial success” (1996:286). This argument is supported by March (1984), who suggests that
job performance of CEOs is quite ambiguous and difficult to determine; as a consequence, high
compensation might be associated with a perception of high performance and high ability. Based
on equity theory, Finkelstein and Hambrick (1996:287) then hypothesized that “The greater the
compensation of executives relative to peer groups, the lower their turnover.”
Of course, March’s (1984) signaling argument can also lead to the opposite prediction: If
compensation is an indicator of performance, then highly compensated CEOs may be sought by
other firms, resulting in a positive relationship between compensation and turnover.
Nevertheless, we follow the retention rationale used by firms to justify high CEO compensation,
supported by equity theory. In our view, the relevant comparison group is other CEOs in the
same industry, since this is the primary labor market in which CEOs operate. Thus we
hypothesize:
H1: There is a negative relationship between total CEO compensation relative to the industry
and the probability that the CEO will leave the company.
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Compensation Components
Total CEO compensation is made up of various components: salary, annual bonus, stock
option grants, restricted stock, stock appreciation rights, and other forms of long-term
compensation based on company performance, such as performance shares. Proxy statements
filed with the SEC also report additional compensation components (perquisites, contributions to
retirement plans, etc.) which generally account for only a small percentage of the total
compensation received by top executives.
The social comparison and equity arguments can also be applied to the components of
CEO compensation. In particular:
H2: There is a negative relationship between CEO salary relative to the industry and the
probability that the CEO will leave the company.
H3: There is a negative relationship between CEO bonus relative to the industry and the
probability that the CEO will leave the company.
We also consider two other compensation components, stock option grants and restricted
stock grants. In these cases, the social comparison and equity predictions are reinforced by the
predictions of agency theory (Fama and Jensen, 1983). Options and restricted stock link CEO
compensation to the future performance of the firm and defer CEO income from these sources.
So not only do they align CEO and shareholder interests, but they also provide an incentive for
the CEO to remain with the firm.
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H4: There is a negative relationship between the value of stock option grants relative to the
industry and the probability that the CEO will leave the company.
Restricted stock grants are grants of shares that are earned if the CEO remains with the
company over some specified period of time (usually 3 to 5 years). CEOs only receive these
shares if they are still employed by the firm when the shares vest. Restricted shares may be a
more powerful incentive to stay, compared to stock options, for two reasons. First, the value of
restricted shares does not depend on performance (except perhaps a minimum constraint), so
unlike options, a future payoff is more “guaranteed.” Second, the payoff is the full share value,
not the price differential inherent in options. So potentially, restricted stock grants provide a
more certain and larger payoff. In rational economic decision theory, a larger certain payoff is
always preferred to a smaller, more uncertain one. This parallels the longstanding argument by
Mobley et al. (1979) that employees’ expectations about future desirable outcomes can promote
loyalty. Many reports on executive compensation in corporate proxy statements present
restricted shares as the tool of choice to retain qualified executives.
H5: There is a negative relationship between the grant of restricted shares relative to the
industry and the probability that the CEO will leave the company.
Stock options have an additional dimension. The CEO is not only tied to the company
through the current grant of stock options but also through the total stock options accumulated
over his/her tenure. CEOs can accumulate substantial numbers of options since options are
frequently granted once or more per year.
8
H6: There is a negative relationship between the aggregate value of stock options and the
probability that the CEO will leave the company.
Of course, stock options and restricted share grants will only promote retention if CEOs
are not “made whole” if they change employment. But not all CEOs are in high demand by other
firms, and these incentives to remain with the firm may reduce the likelihood of looking
elsewhere.
Other Factors
A CEO may be less motivated to seek employment elsewhere if the potential for financial
improvement is limited. A change of employer is associated with significant risks for the CEO,
and the CEO has to prove his/her ability in the new position. Therefore, we expect that CEOs
will be more motivated to seek employment elsewhere and be more willing to accept increased
risk if the potential financial gains are higher.
H7: There is a positive relationship between the difference in the compensation of the highest
paid CEO in the industry and the compensation of the focal CEO, and the probability that the
CEO will leave the company.
CEOs who have previously received substantial pay raises are expected to be less likely
to seek employment elsewhere. Pay raises provide financial incentives for the CEO to stay and
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signal a stamp of approval from the board. They also make salient the potential for additional
increases in the future.
H8: There is a negative relationship between the raise received by the CEO and the probability
that the CEO will leave the company.
CEO ownership is generally considered to be a source of power (Finkelstein, 1992). A
CEO who has a substantial amount of his/her wealth in stockholdings of the company enjoys a
position of high power and has motivation to stay with the company. Ownership also reduces the
likelihood of CEO dismissal by the board (Boeker, 1992). We expect that CEOs who own a large
amount of stock in the company are less likely to seek employment elsewhere.
H9: There is a negative relationship between the value of the shares owned by the CEO and the
probability that the CEO will leave the company.
METHODS
Sample and Data Sources
The ExecuComp data set, developed by Standard & Poor’s, was the main data source for
all data on CEO and company financial information. This data set includes detailed information
on compensation components of the top five executives for all firms included in the S&P 500,
mid-cap, and small-cap indices. Most previous studies of executive compensation used reviews
of compensation by Fortune and Business Week, which cover only larger companies and have
less detailed breakdowns of compensation components. Researchers engaging in the laborintensive task of extracting data from corporate proxy statements generally worked with smaller
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samples. The ExecuComp data set allows the opportunity to include in the analysis detailed
compensation information for a large number of companies with a broad size range. (A word of
caution is in order for ExecuComp users, however; this data requires substantial cleaning – for
example, the value of severance packages is included in total compensation – necessitating
careful reading of the footnotes.)
The original population for this study consisted of all 1392 firms included in the
ExecuComp data set that were in existence from 1995 through 1997. Firms were then excluded if
the CEO died, if fiscal year changes made the compensation data not comparable, if the CEO
was not in office during the whole year in 1995, or if the company had more than one person
identified as the CEO in 1995. The final sample used in the analysis included 1233 firms,
including firms from a broad range of economic sectors encompassing 61 2-digit SIC categories.
Missing data for some variables further reduced the firms included in the various models
estimated.
Table 1 provides a description of the final sample, including a description of the 2-digit
SIC categories and the number of firms in each. In some cases, there were too few firms in a 2digit category to obtain estimates, or estimation was not possible due to a lack of variation in
outcomes. In these cases, the categories were combined with others to avoid further reduction in
sample size. These combinations are also shown in Table 1. Further analyses, not presented here,
were conducted with these cases omitted rather than combined; in no instance was the pattern of
significance in the estimates changed.
----------------------Table 1 about here
-----------------------
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Variables
Dependent variable. The measure of CEO turnover is based on a comparison of the
individuals identified as the CEO in 1995 and in 1997. Turnover was observed whenever the
CEO listed in the ExecuComp database for 1997 differed from the CEO listed in 1995. For the
1233 firms included in the final sample, 214 changed the CEO, a two-year turnover rate of 17.4
percent.
Although it would have been preferable to distinguish between voluntary turnover and
dismissal, we did not attempt to make this distinction. As other researchers have found, there is
no reliable way to classify the motives for CEO turnover (Ocasio, 1999), and researchers have
generally been forced to combine these types of turnover due to data limitations (Denis et al.,
1997; Ocasio, 1994; Puffer & Weintrop, 1991). Prior studies have found that most turnover is
voluntary. James and Soref (1981) were only able to identify 16 turnover events out of 110 as
probable firings. Friedman and Singh (1989) reported that only 14 of 130 succession events were
“board initiated”. Cannella and Lubatkin (1993) identified 95 of 472 succession events as
dismissals, using a measure – severance of all ties with the firm – that they admit may overstate
the number of dismissals. Parrino (1997) classified 87 percent of 977 turnover events in large
public firms between 1969 and 1989 as voluntary turnover. Overall, it appears that dismissals
constitute ten to 15 percent of CEO turnover events. As Vancil (1987:29) observed, “It is rare for
a board to lose confidence in its CEO to such an extent that it dismisses him and seeks a
replacement.” Still, the inability to identify involuntary turnover is a limitation of this study.
Independent variables. All independent variables are measured for 1995. Total
compensation is measured as salary, bonus, value of restricted share grants, value of stock option
grants and “other annual” and “all other” compensation. These are the main categories reported
12
in the proxy statements. “Other annual” compensation includes compensation not categorized as
salary or bonus (e.g. perquisites, payments to cover an executive’s taxes). The “all other”
category includes compensation that is not reported under any other column of the Summary
Compensation Table, including contributions to defined contribution plans and insurance
payments. Total compensation is transformed into relative compensation by dividing the log of
total CEO compensation by the log of the average total compensation, excluding the focal firm,
for the industry identified at the 2-digit SIC level (the industry level used for all comparative
measures). The log is used to capture the utility of the CEO’s compensation and to improve the
statistical properties of the compensation distribution.
Relative salary, relative bonus, and relative stock option grants are calculated by dividing
the logs of salary, bonus and the Black-Scholes value of stock option grants in 1995 by the logs
of the industry averages, calculated excluding the focal firm. We set bonus and value of stock
option grants to $1 if CEOs did not receive these compensation components, so as not to loose
too many observations in the log transformation (dropping these cases reduces sample size
without substantially affecting the findings). Aggregate option grants is measured as the log of
the value of all unexercised options that are not exercisable (option grants that had not yet
vested). This value is reported in proxy statements as the difference between the exercise price
and the market price for all unexercised and not yet exercisable stock options granted to the CEO
since he/she joined the company. We excluded unexercised options that are exercisable because
they do not provide an incentive for the CEO to stay with the company; they can be exercised by
the CEO at any time without forfeiting any part of them. Again, we set this value to $1 if a CEO
did not have any unexercised but not yet exercisable options, so as not to loose too many
observations in the log transformation. The granting of restricted stock is measured as a dummy
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variable that takes the value of 1 if the CEO received restricted stock in 1995 and 0 otherwise,
since few CEOs receive this form of compensation (only 236 out of 1233); it was then
transformed to relative restricted stock grants by subtracting from it the industry average
(calculated by excluding the focal firm) for this dummy.
Distance to the highest compensation in the industry is measured as the percentage
difference between the total compensation of the CEO and the highest total CEO compensation
in the industry. Pay raise is a percentage calculated as the change in CEO salary between 1994
and 1995 divided by the salary in 1994. CEO ownership is calculated by multiplying the number
of shares held by the CEO by the share price at the end of fiscal year 1995, and taking the log.
Control Variables. We included control variables for firm size and performance, for the
CEO characteristics of tenure, retirement age, and serving as chairman of the board, and for
industry. Firm size was measured as the natural log of the firm’s assets in 1995. Firm
performance was measured in two ways. Stock market performance was measured as the average
total return to shareholders (TRS) for the three-year period ending in 1995. Operating
performance was calculated as the return on assets (ROA) in 1995. Industry adjusted measures
are used for both performance measures. CEO tenure was measured by the number of years the
CEO had held the position in 1995. Retirement is controlled for by a dummy variable
(Retirement) with a value of 1 if the CEO is 63 years of age or older in 1995. Missing age data in
the ExecuComp database was filled in by using proxy statements and Standard & Poor’s
Directory of Corporations, Executives and Directors. Chairman was measured as a dummy
variable with the value of 1 if the CEO was also Chairman of the Board in 1995. We controlled
for industry using dummy variables for each 2-digit industry.
Interactions. Additionally, we examined a number of interactions. The objective of the
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interaction tests was to identify other potential effects on turnover. First, we explored the
possibility that compensation relative to the industry only has an impact on turnover if CEO
ownership is low; if CEOs have a high stake in the company, they may not be motivated to leave
simply for more compensation. Next, we examined the possibility that compensation and
performance interact to influence turnover; an interaction may be expected if high CEO
compensation is not justified by firm performance, and could indicate involuntary turnover.
Finally, we considered interactions between performance and ownership. Two opposing
arguments can be made about such interactions: from a rational perspective, a CEO with a strong
ownership position may step aside if performance suffers, in the hope that a successor will be
able to improve performance and enhance the stock value; from a political perspective, however,
poor performance may lead a CEO with power through ownership to react defensively and
become more entrenched in his/her position (see Pfeffer, 1981).
FINDINGS
Table 2 reports descriptive statistics for all variables used in the analysis. Table 3 gives
the correlation matrix for the variables.
------------------------------Tables 2 and 3 about here
-------------------------------
We tested our hypotheses using logistic regression models to estimate the likelihood of
CEO turnover, since the dependent variable is dichotomous. In testing performance interactions,
we tried both performance measures. Of the interactions tested, we found only a significant
interaction between CEO ownership and total return to shareholders, and report this in the tables;
15
the other interactions, all insignificant, are not included.
We present the findings in two sets of tables to avoid the problems of estimating effects
of total compensation in the same models with its components and estimating effects of
aggregate option grants in the same models with current option grants. The first set of findings is
shown in Table 4. All models in this and the other tables include CEO ownership, all control
variables, and dummy controls for all 2-digit industries; to conserve space, the estimates for the
dummy industry controls are not shown in the tables. To this base, Model 1 adds relative
compensation, and Models 2, 3, and 4 substitute distance, pay raise, and aggregate option grants,
respectively. Model 5 includes all variables. (In this and subsequent tables, we report the hit rate
for the models and, for comparison, note the expected hit rate for a random model; see Bayus
and Gupta, 1992, and Gulati, 1995.) Model 6 includes a significant interaction between CEO
ownership and shareholder return, along with the significant effect of aggregate stock options.
Model 7 shows all variables in Model 5 with the interaction term added.
---------------------Table 4 about here
----------------------
Collectively, these models test all hypotheses not focused on individual annual
compensation components (Hypotheses 1, 6, 7, 8, and 9). We find no support for effects of
relative total compensation, the CEO’s distance from highest compensation in the industry, or
pay raises on the likelihood of the CEO leaving the firm. In analyses not reported here, we also
tested total compensation in a variety of alternate functional forms, including unlogged versions,
quadratic forms, and the non-relative measure. No significant effects were observed in any form.
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The best model in Table 4, based on Chi-square tests, is Model 6. We found significant
effects regarding CEO ownership and the aggregate value of stock option grants. CEO ownership
(Hypothesis 9) enhanced retention; this effect was very robust. The aggregate value of stock
option grants (Hypothesis 6) also enhanced CEO retention.
The interaction of ownership and shareholder return was also significant. This effect is
interpreted in Figure 1, which shows the interaction surface along with the sample points plotted
in the x-y plane. The vertical line in the figure shows the location of the saddle point on the
interaction surface, and the two heavy lines in the x-y plane show the x and y values of the
saddle point. Most of the data points lie below the saddle point value for performance. The figure
indicates that CEO turnover is lower for poorly performing firms with high CEO ownership, and
turnover is higher for poorly performing firms with low CEO ownership.
----------------------Figure 1 about here
----------------------We extended this analysis by separating manufacturing and non-manufacturing firms in
the sample. The results are shown in Tables 5 and 6 (again not showing the industry control
estimates). In Table 5, Model 6 is again the best model; the interaction interpretation is the same
as for Table 4 and the plot is nearly identical, so it is not shown. In Table 6, Model 4 is the best
model; the interaction effect is not significant for non-manufacturing firms. These two tables
show that CEO ownership reduces turnover only for manufacturing firms, while aggregate stock
options promote CEO retention only for non-manufacturing firms.
------------------------------Tables 5 and 6 about here
-------------------------------
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Retaining the significant CEO ownership effect and the control variables, we then tested
for effects of individual components of CEO compensation. These tests are shown in Tables 7, 8,
and 9. Following a strategy analogous to Table 4, we examined the individual effects of relative
salary, bonus, stock option grants, and restricted stock grants (Models 1-4). Model 5 includes all
these variables in the same model, Model 6 includes the significant compensation terms and the
interaction of ownership and shareholder return, and Model 7 re-estimates Model 5 with the
interaction term included. Again the industry controls are not shown in the tables; in Tables 7
and 9, one industry was dropped by the statistical package for lack of variance, affecting the
degrees of freedom reported. As with total compensation, various operationalizations of the
compensation components were tested, with no change in the patterns of significance from that
reported here (except that stock options lose significance for non-manufacturing firms in Table 9
when their value is not logged).
---------------------------------Tables 7, 8, and 9 about here
----------------------------------
As Table 7 shows, both relative stock options and relative restricted stock grants have
significant effects, as do CEO ownership and the interaction of ownership and shareholder
returns (based on Chi-square tests, Model 6 is the best model). The stock option finding supports
Hypothesis 4. However, the restricted stock grant effect is the opposite of what we predicted in
Hypothesis 5. We expected that relative restricted stock grants would decrease the likelihood of
CEO turnover; however, as Model 6 shows, they increase the likelihood of CEO turnover. A
possible explanation for this result is provided in the discussion section. Hypothesis 9 (CEO
ownership) is again supported, but Hypotheses 2 and 3 (salary and bonus) are not. The
interaction effect is nearly identical to the earlier ones and is not plotted.
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As before, we then separated manufacturing and non-manufacturing firms and reran the
analyses to produce Tables 8 and 9. Model 6 is the best model in Table 8, and Model 3 is the best
model in Table 9. These two tables show that restricted stock grants actually promote turnover
for manufacturing firms and that, consistent with the earlier findings, stock options only promote
CEO retention for non-manufacturing firms. The interaction effect persists only for
manufacturing firms.
Of the control variables, we observed a weak quadratic effect of tenure, with CEO exit
being most likely for CEO tenure of about 12 or 13 years. There is also a strong retirement
effect. We observed a positive effect of firm size on CEO turnover for manufacturing firms.
Holding the board chair position had a positive effect on turnover only in Table 5. The only
performance effect is that associated with the ownership interaction for manufacturing firms.
DISCUSSION
The lack of significant effects for most of the compensation-related variables casts doubt
on the argument that higher compensation is effective in retaining CEOs. One exception is stock
options, but given this variable’s lack of significance in the manufacturing sub-samples, it
appears that options are at best only effective for CEO retention for non-manufacturing firms.
The limited support for the effect of stock options lends some credence to the agency theory
perspective that options link the CEO more tightly to the firm’s future. Although CEOs may be
“made whole” when other firms try to hire them, it is not known how prevalent this practice is;
perhaps most CEOs are not in enough demand to command the extra expenses required for this
practice.
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We found a surprising result regarding the effect of restricted stock grants for
manufacturing firms. CEOs who receive restricted stock grants in manufacturing industries
where they are less prevalent are more likely to leave the company. CEOs who do not receive
restricted stock grants in industries where other CEOs receive them are less likely to leave. This
finding conflicts with the commonly held assumption that restricted stock grants will increase
CEO loyalty by motivating them to stay at least for the duration of the vesting period (usually 3
to 5 years), and contradicts the social comparison and equity perspectives. One possible
explanation for this effect may be the signaling content of restricted stock grants. It could be that
grants of restricted stock are perceived as signs of managerial competence. A grant of restricted
stock is a good signal in Spence’s (1974) terms, since it is costly for the firm (they are essentially
giving away shares) and it is relatively rare compared to stock options (only 236 out of 1233
CEOs received restricted grants). So CEOs who receive these grants really stand out, and other
firms may be much more likely to make the CEO “whole.” Overall, there is strong evidence that
the retention justification for grants of restricted shares is not valid.
CEO ownership showed effects on turnover only for manufacturing firms, mediated by
total return to shareholders. The interaction analysis reinforced the view that ownership fosters
power. CEOs with ownership power apparently use their power to entrench themselves, enabling
them to survive periods of poor performance. Ownership, then, provides CEOs with a buffer
against poor performance, consistent with Boeker’s (1992) finding.
The power perspective also offers a possible interpretation of the failure to find a strong
relationship between compensation and turnover. CEOs have a great deal of power over the
compensation-setting process, and can use this power to obtain compensation packages as large
as can be reasonably justified; social comparison and equity arguments are a part of the
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justification process (Elhagrasey et al., 1999). If CEOs have strong influence on their
compensation and are earning as much as they can reasonably expect, they should be less likely
to leave their firms because of dissatisfaction with compensation.
The effects of the control variables vary across model specifications. Size is only
significant for the manufacturing sub-sample. Previous research did not find a consistently
significant effect of size on turnover (Ocasio, 1999). James and Soref (1981) found that larger
firms were more likely to dismiss their CEOs than were smaller firms, but Boeker (1992) did not.
Harrison et al. (1988) found that larger firms experience higher rates of CEO turnover, but Puffer
and Weintrop (1991) and Ocasio (1994) did not. So our findings do nothing to resolve this
inconsistency. Our sample is larger and includes more small firms than most previous work,
however, so it is possible that the effect is confined to very large companies, which are more
likely to have older CEOs (Vancil, 1987), mandatory retirement requirements, and succession
plans.
Having a separate chairman had inconsistent effects. There was no significant effect in
the full sample but a positive effect in the manufacturing subsample for one model (i.e., the
combined position increased the chances of turnover). Previous work has found a significant
relationship in the other direction. Harrison et al. (1988) and Ocasio (1994) found that the
combined position decreased CEO turnover. So this issue remains unresolved. As with the size
finding, the number of small firms in the sample could be a factor. Perhaps CEOs holding the
combined position in small firms may be more in demand in the CEO labor market and
interested in positions with larger firms (carrying higher compensation), while CEOs of larger
firms may be more content when they have combined positions.
21
We found in our sample that operating performance was never significantly related to
CEO turnover in the best models, and stock market performance was only significant in the
interaction with performance for manufacturing firms. These findings are surprising, considering
that previous researchers generally found a significant effect of performance on turnover. Again,
one explanation for our non-finding might lay in the broader sample used in this study, as
compared to most previous turnover studies.
The dummy variable for retirement age is consistently significant across the models,
indicating that the probability of turnover is significantly higher if the CEO is 63 years old or
older. There is also a weak quadratic relationship between CEO tenure and turnover for
manufacturing firms. We find an increasing effect of tenure on turnover for lower tenure,
followed by a decreasing effect as tenure increases further. These findings support those of
Ocasio (1994).
A major issue raised by our findings is the difference in retention/turnover patterns
between manufacturing and non-manufacturing firms. Using t-tests, we found that the nonmanufacturing firms in our sample were significantly larger, but there were no significant
differences between manufacturing and non-manufacturing firms in terms of turnover,
performance, CEO ownership, tenure, chairman, stock options, or restricted stock grants.
Finally, we call attention again to the study’s limitation of not identifying involuntary
turnover (other than through the retirement control). Pitcher et al. (2000) discuss the importance
of distinguishing between voluntary and involuntary turnover and recommend field studies for
this purpose, but note the high level of difficulty in making this distinction in large-sample
research. Although we expect from previous work that involuntary events constitute a relatively
small proportion of our sample, and although we found no compensation-performance
22
interaction, which could indicate involuntary departures, future studies of the effects of
compensation on CEO turnover that can reliably identify involuntary turnover would be
desirable.
CONCLUSION
Corporate proxy statements contain various justifications used to explain the
compensation scheme of a particular company. One justification frequently used is that higher
CEO compensation reduces exit and increases loyalty. The goal of this paper was to examine the
empirical validity of this justification and the social comparison and equity perspectives
associated with it.
The findings, based on a large sample of companies in a wide range of industries,
indicate that the relative level of total CEO compensation has little effect on the loyalty of CEOs,
refuting frequent justifications made in corporate proxy statements that high CEO compensation
is a tool to retain managerial talent. This result also holds across different operationalizations of
compensation and most components of CEO compensation.
The grant of restricted stock relative to the industry, in fact, showed the opposite effect.
Restricted stock grants seem to facilitate CEO departures. It could be that grants of restricted
stock act as a strong signal of managerial competence. As a consequence, CEOs who receive
them will be in higher demand in the managerial labor market and will have a better chance of
being “made whole” by a new employer. Our results therefore strongly imply that the retention
justification for restricted stock grants is not valid.
The value of stock options in non-manufacturing firms was another exception to the
general pattern of findings. Stock options can be an effective retention mechanism for non-
23
manufacturing industries. Our findings also show convincingly that substantial share ownership
by the CEO provides a strong incentive to stay loyal to the company; to the extent that stock
options eventually increase share ownership by CEOs, they can serve to promote CEO retention
– but not if they are simply “cashed in” when they are exercised.
From a shareholder perspective, however, the question remains of whether the excessive
use of stock options is justified by the value of retaining the CEO. The large-scale exercise of
stock options has the potential to depress earnings and stock prices. Further, long-term CEO
retention may not be in the best interests of the firm: CEO loyalty, including entrenchment
through ownership, may be detrimental in an industry that frequently requires new leadership
talents to effectively deal with the changing strategic environment.
Questions concerning the structure of compensation plans – particularly their executive
retention value – are timely in the current debate on the efficacy of corporate governance
mechanisms. They offer fruitful grounds for further investigation. In this area, academic research
has the potential to provide guidance for board decision making and to inform public policy on
corporate governance.
24
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27
Table 1. Sample description (N = 1233)
SIC
Description of SIC
01
02
10
13
14
Agricultural production - crops
Agricultural production - livestock
Metal mining
Oil & gas extraction
Mining & quarrying - nonmetallic
minerals
Building construction - gen contractors
Heavy construction except building
Construction-spcl trade contractors
Food & kindred products-mfrs
Tobacco products-mfrs
Textile mill products-mfrs
Apparel & otr finished products-mfrs
Lumber & wood prods except furntr-mfrs
Furniture & fixtures-mfrs
Paper & allied products-mfrs
Printing publishing & allied industries
Chemicals & allied products-mfrs
Petroleum refining & related inds-mrfs
Rubber & miscellaneous plastics-mfrs
Leather & leather products-mfrs
Stone clay glass & cncrete prods-mfrs
Primary metal industries-mfrs
Fabricated metal products-mfrs
Industrial & comm. machinery-mfrs
Electronic & otr electrical equip mfr
Transportation equipment-mfrs
Measuring & analyzing instrmnts-mfrs
Misc-manufacturig inds-mfrs
Railroad transportation
Local/suburban transit & hwy pssngr
Motor freight trans/warehouse
15
16
17
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
Nr of
firms
4
1
13
37
3
Combined
with
7
5
2
34
2
16
13
11
8
22
31
102
14
12
5
8
34
21
72
71
41
54
12
6
1
11
16
01
16
39
39
25
30
30
45
SIC
Description of SIC
44
45
47
48
49
Water transportation
Transportation by air
Transportation services
Communications
Electric gas & sanitary services
Nr of
firms
4
14
4
26
104
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
67
70
72
73
75
78
79
80
82
87
Wholesale trade - durable goods
Wholesale trade - nondurable goods
Building materials & hardware
General merchandise stores
Food stores
Auto dealers & service stations
Apparel & accessory stores
Home furniture & furnishings stores
Eating & drinking places
Miscellaneous retail
Depository institutions
Nondepository credit institutions
Security & commodity brokers
Insurance carriers
Insurance agents-brokers & service
Holding & other investment offices
Hotels rooming houses & camps
Personal services
Business services
Auto repair services & parking
Motion pictures
Amusement & recreation services
Health services
Educational services
Engineering & accounting & mgmt svcs.
28
16
7
18
11
4
15
10
23
24
60
9
15
44
7
2
3
6
63
2
6
6
15
1
13
28
Combined
with
45
53
59
60
64
78
73
73
78
73
Table 2. Descriptive statistics (N = 1233)
Variable
All Firms
Mean
Manufacturing
Std. Dev.
Minimum
Maximum
Mean
NonManufacturing
Mean
1. CEO turnover
.17
.38
0
1
.17
.17
2. Relative compnsation
.95
.11
.51
1.47
.95
.96
3. Distance
10.65
19.71
0
274.24
13.61
7.97
4. Pay raise
.06
.17
-1
3.57
.08
.05
4.37
3.40
0
11.41
4.55
4.22
6. Relative salary
.98
.11
-1.05
1.30
.98
.98
7. Relative bonus
.79
.40
0
1.73
.81
.78
8. Relative stock options
.65
.49
0
2.71
.67
.64
-1.76e-09
.40
-.5
1
-7.92e-10
-2.63e-09
10. CEO ownership (log)
8.34
2.05
.98
15
8.47
8.23
11. Size (log of assets)
7.15
1.73
2.26
12.67
6.80
7.46
12. CEO tenure
8.60
7.40
1
51
8.50
8.68
128.70
248.65
1
2601
127.29
129.96
14. Retirement
.17
.37
0
1
.19
.15
15. Chairman
.66
.48
0
1
.66
.65
16. Return on assets
.77
9.11
-76.75
34.60
.38
1.13
17. Shareholder return (3-yr avg)
-.32
20.39
-71.36
110.231
-.64
-.04
18. Ownership * Shareholder return
5.89
181.10
-562.14
1044.08
.38
10.71
5. Aggregate stock options (log)
9. Relative restricted stock grants
13. CEO tenure squared
29
Table 3. Correlation matrix (N = 1233)
Variable
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
CEO turnover
Relative compensation
Distance
Pay raise
Aggregate stock options
Relative salary
Relative bonus
Relative stock options
Relative restricted stock grants
CEO ownership
Size
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return
Ownership*Shareholder return
Variable
10.
11.
12.
13.
14.
15.
16.
17.
18.
CEO ownership
Size
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return
Ownership*Shareholder return
*p < .05
**p < .01
1
2
1.00
-.02
.02
-.03
-.10
-.004
-.02
-.06
.03
-.06
-.01
.02
-.002
.27
.03
-.07
-.05
-.03
1.0
-.57
-.005
***
.40
.49
.51
*
.57
.26
*
.12
.55
-.002
-.004
*** -.02
.22
*
.12
.20
.18
10
11
1.00
.07
.44
.35
.20
.21
.19
.17
.16
*
1.00
*** -.09
*** -.09
***
.02
***
.20
***
.07
***
.03
*** -.009
3
***
***
***
***
***
***
***
***
***
***
***
***
1.00
-.003
-.18
-.30
-.29
-.28
-.12
.01
-.34
.03
.04
-.001
-14
-.05
-.08
-.06
4
1.00
*** .0004
***
-.02
*** .008
***
.03
***
.01
-.007
***
-.08 **
.02
-.01
**
-.05
***
.02
-.10 ***
**
.04
*
.05
12
**
**
***
**
1.00
.93
.40
.22
.10
.07
.06
13
***
***
***
**
*** p < .001
30
1.00
.41 ***
.15 ***
.09 **
.04
.04
5
1.00
.15
.33
.45
.05
.05
.26
-.08
-.10
-.10
.06
.10
.32
.31
6
***
***
***
***
*
**
**
*
**
***
***
14
1.00
.14 ***
.07 *
-.02
-.05
1.00
.28
.16
.11
.05
.43
.04
.002
.05
.18
.08
.03
.03
15
1.00
.03
.03
.02
7
***
***
***
***
***
**
1.00
.21
.12
.05
.34
-.002
-.01
-.01
.14
.24
.24
.21
8
***
***
***
***
***
***
***
16
1.00
.33 ***
.30 ***
1.00
.13
-.05
.24
-.15
-.15
-.13
.07
-.02
.07
.07
9
***
***
***
***
***
*
*
*
17
1.00
.97 ***
1.00
.01
.13 ***
-.06 *
-.06
-.02
.11 ***
.03
.03
.03
18
1.00
Table 4. Logistic regression estimates of CEO turnover in all firms
Variable
Relative compensation
Model 2
Model 1
Model 3
-.71
(.84)
Aggregate stock options
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
-.09
(.03)
-.17
(.06)
.18
(.07)
.09
(.04)
-.003
(.001)
2.14
(.24)
.15
(.23)
-.02
(.01)
.005
(.006)
-1.44
(1.6)
-.03
(.02
-.98
(.87
-.11
(.04)
-.19
(.06)
.28
(.10)
.13
(.05)
-.005
(.002)
2.17
(.26)
.12
(.26)
-.02
(.01)
.008
(.007)
-.005
(.008)
Pay raise
Size
Grants
Model 5
-1.03
(1.08)
Distance
CEO ownership
Model 4
-.16
(.06)
.19
(.09)
.10
(.04)
-.004
(.001)
2.18
(.24)
.10
(.24)
-.02
(.01)
.0004
(.005)
**
*
*
**
***
*
-.16
(.06)
.11
(.08)
.09
(.04)
-.004
(.001)
2.19
(.24)
.09
(.24)
-.02
(.01)
-.0005
(.005)
**
*
**
***
*
-.21
(.06)
.24
(.08)
.14
(.05)
-.005
(.002)
2.14
(.25)
.11
(.26)
-.02
(.01)
-.001
(.006)
***
***
**
**
***
**
**
*
*
**
***
*
**
**
**
*
**
***
Ownership * TRS
Constant
N
Hit rate a
Chi square
Df
-1.39
(1.63)
989
85.14
152.65 ***
51
-2.03
(1.45)
991
85.07
152.43 ***
51
-2.86
(1.50)
896
85.71
146.85 ***
51
* p  .05 ** p  .01 *** p  .001
Expected hit rates from a random model range from 72.09 to 73.02 .
Industry control variables not shown. Standard errors are in parentheses.
a
31
-2.13
(1.43)
1001
85.31
157.78 ***
51
-1.47
(2.01)
889
85.83
15844 ***
54
Model 6
Model 7
-.09
(.03)
-.15
(.06)
.20
(.07)
.09
(.04)
-.003
(.001)
2.24
(.24)
.14
(.24)
-.02
(.01)
-.05
(.02)
.006
(.002)
-2.54
(1.45)
-1.41
(1.63)
-.03
(.02)
-1.04
(.86)
-.11
(.04)
-.18
**
(.07)
.31
(.10)
.13
(.05)
-.005
(.002)
2.27
(.26)
.12
(.27)
-.02
(.01)
-.05
(.02)
.007
(.003)
-1.88
(2.00)
**
**
**
*
**
***
*
**
1001
86.01
165.70 ***
52
**
**
**
*
**
***
*
**
889
86.73
164.94 ***
55
Table 5. Logistic regression estimates of CEO turnover in manufacturing firms
Variable
Relative compensation
Model 2
Model 1
Model 3
Model 5
-.07
(.05)
-.23
(.09)
.24
(.10)
.12
(.06)
-.004
(.002)
2.32
(.34)
.74
(.39)
-.03
(.01)
.002
(.008)
-.43
(2.58)
-.04
(.03)
-.72
(1.28)
-.10
(.06)
-.24
(.10)
.20
(.15)
.21
(.08)
-.008
(.003)
2.37
(.37)
.81
(.44)
-.02
(.02)
.007
(.010)
.32
(.1.78)
Distance
-.003
(.01)
Pay raise
-.11
(1.07)
Aggregate stock options
CEO ownership
Model 4
-4.42 **
(1.59)
-4.11 **
(1.37)
-5.02 ***
(1.39)
-4.13 **
(1.31)
-3.37
(2.44)
N
Hit rate a
Chi square
Df
466
85.41
88.47 ***
23
466
84.98
88.56 ***
23
426
85.92
80.56 ***
23
468
86.54
87.93 ***
23
426
86.15
86.86 ***
26
468
86.32
93.76 ***
23
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
*
*
***
-.24
(.09)
.19
(.11)
.16
(.07)
-.006
(.002)
2.36
(.34)
.77
(.39)
-.03
(.01)
-.003
(.008)
**
*
*
***
-.25
(.09)
.28
(.10)
.21
(.08)
-.007
(.003)
2.29
(.35)
.77
(.43)
-.02
(.02)
-.001
(.008)
**
**
**
**
***
**
*
*
***
*
-.33
(2.59)
-.03
(.03)
-.80
(1.26)
-.11
(.06)
-.21
(.10)
.25
(.16)
.20
(.08)
-.007
(.003)
2.46
(.37)
.86
(.45)
-.01
(.02)
-.08
(.04)
.009
(.004)
-4.16
(2.45)
Constant
CEO tenure
**
Model 7
-.19
(.09)
.21
(.10)
.11
(.06)
-.003
(.002)
2.44
(.34)
.87
(.41)
-.02
(.01)
-.009
(.003)
.01
(.003)
-4.84
(1.36)
Size
Grants
-.24
(.09)
.19
(.14)
.16
(.07)
-.006
(.002)
2.35
(.34)
.76
(.39)
-.02
(.01)
-.003
(.008)
Model 6
**
**
***
*
Ownership * TRS
* p  .05 ** p  .01 *** p  .001
Expected hit rates from a random model range from 72.51 to 73.19.
Industry control variables not shown. Standard errors are in parentheses.
a
32
*
*
***
*
**
**
***
*
**
**
***
*
*
426
86.15
92.59 ***
27
Table 6. Logistic regression estimates of CEO turnover in non-manufacturing firms
Variable
Relative compensation
Model 1
Model 2
Model 3
Model 4
-1.98
(1.42)
Distance
-.005
(.02)
Pay raise
-2.16
(1.42)
Aggregate stock options
Model 5
-2.34
(2.25)
-.02
(.03)
-1.96
(1.45)
-.11 *
(.05)
-.16
(.09)
.35 *
(.14)
.06
(.07)
-.003
(.002)
2.02 ***
(.38)
-.34
(.36)
-.01
(.02)
.007
(.009)
Model 6
-.09
(.08)
.16
(.12)
.06
(.06)
-.003
(.002)
2.05 ***
(.35)
-.32
(.31)
-.02
(.02)
.002
(.007)
-.08
(.08)
.05
(.11)
.05
(.06)
-.003
(.002)
2.03 ***
(.35)
-.35
(.31)
-.02
(.02)
.0007
(.007)
-.18 *
(.09)
.21
(.11)
.08
(.07)
-.003
(.002)
1.98 ***
(.37)
-.32
(.35)
-.01
(.02)
-.0009
(.009)
-.09 *
(.05)
-.10
(.08)
.11
(.10)
.06
(.06)
-.003
(.002)
1.97 ***
(.35)
-.23
(.31)
-.01
(.02)
.006
(.008)
Constant
-.35
(1.89)
-1.62
(1.60)
-2.48
(1.74)
-1.74
(1.56)
-.75
(2.60)
-.09 *
(.05)
-.10
(.08)
.13
(.11)
.06
(.06)
-.003
(.002)
2.06 ***
(.36)
-.26
(.31)
-.01
(.02)
-.03
(.03)
.004
(.003)
-2.02
(1.58)
N
Hit rate a
Chi square
Df
523
84.7
76.76 ***
36
525
85.33
75.08 ***
36
470
86.81
76.73 ***
36
533
84.99
79.01 ***
36
463
87.26
83.70 ***
39
533
85.55
80.95 ***
37
Grants
CEO
ownership
Size
CEO
Grants
tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
Ownership * TRS
* p  .05 ** p  .01 *** p  .001
Expected hit rates from a random model range from 67.84 to 72.89.
Industry control variables not shown. Standard errors are in parentheses.
a
33
Model 7
-2.35
(2.26)
-.02
(.03)
-1.91
(1.43)
-.10 *
(.05)
-.16
(.09)
.36 *
(.15)
.06
(.08)
-.003
(.002)
2.12 ***
(.39)
-.36
(.36)
-.02
(.02)
-.03
(.03)
.004
(.004)
-.91
(2.60)
463
86.83
84.96 ***
40
Table 7. Logistic regression estimates of CEO turnover in all firms
Variable
Relative salary
Model 2
Model 1
Model 3
-.50 *
(.21)
Relative restricted stock grants
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
.48
(.23)
-.17
(.06)
.10
(.07)
.09
(.04)
-.003
(.001)
2.18
(.24)
.10
(.24)
-.02
(.01)
-.001
(.005)
-1.30
(.94)
.06
(.28)
-.52
(.21)
.55
(.24)
-.16
(.06)
.20
(.09)
.09
(.04)
-.004
(.001)
2.21
(.25)
.11
(.24)
-.02
(.01)
.0003
(.005)
-.007
(.27)
Relative stock options
Size
Grants
Model 5
-1.37
(.85)
Relative bonus
CEO ownership
Model 4
-.17
(.06)
.18
(.08)
.09
(.04)
-.003
(.001)
2.19
(.24)
.14
(.23)
-.02
(.01)
-.001
(.005)
**
*
*
**
***
*
-.16
(.06)
.12
(.07)
.09
(.04)
-.003
(.001)
2.17
(.24)
.15
(.25)
-.02
(.01)
-.0008
(.005)
**
*
**
***
-.16
(.06)
.16
(.07)
.08
(.04)
-.003
(.001)
2.13
(.24)
.14
(.24)
-.02
(.01)
.0003
(.005)
**
*
*
***
*
*
**
*
*
***
*
*
*
**
*
*
**
***
*
Ownership * TRS
Constant
N
Hit rate a
Chi square
Df
.90
(1.63)
999
85.39
152.59 ***
51
-1.94
(1.52)
995
85.43
150.68 ***
51
-1.64
(1.53)
978
85.07
153.72 ***
50
* p  .05 ** p  .01 *** p  .001
a Expected hit rates from a random model range from 72.09 to 72.29.
Industry control variables not shown. Standard errors are in parentheses.
34
-1.61
(1.48)
999
84.98
154.59 ***
51
-.72
(1.65)
975
84.92
160.21 ***
53
Model 6
Model 7
-.55
(.21)
.53
(.24)
-.15
(.06)
.18
(.08)
.08
(.04)
-.003
(.001)
2.26
(.25)
.09
(.24)
-.02
(.01)
-.06
(.02)
.007
(.002)
-1.93
(1.50)
-1.45
(.96)
.08
(.28)
-.53
(.21)
.54
(.24)
-.15
(.06)
.22
(.09)
.09
(.04)
-.004
(.001)
2.31
(.25)
.10
(.24)
-.02
(.01)
-.06
(.02)
.006
(.002)
-.95
(1.65)
**
*
*
*
*
***
**
**
978
85.69
167.38 ***
52
*
*
*
*
*
**
***
*
**
975
85.85
167.44 ***
54
Table 8. Logistic regression estimates of CEO turnover in manufacturing firms
Variable
Relative salary
Model 2
Model 1
Model 3
Model 4
-1.88
(.99)
Relative bonus
-.38
(.46)
Relative stock options
-.41
(.35)
Relative restricted stock grants
CEO ownership
Size
Grants
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
-.24
(.09)
.28
(.11)
.13
(.06)
-.004
(.002)
2.38
(.34)
.78
(.39)
-.02
(.01)
-.002
(.008)
**
*
*
*
***
*
-.23
(.07)
.23
(.11)
.11
(.06)
-.004
(.002)
2.34
(.34)
.78
(.39)
-.02
(.01)
-.001
(.008)
**
*
***
*
-.23
(.09)
.25
(.11)
.11
(.06)
-.004
(.002)
2.32
(.34)
.77
(.39)
-.02
(.01)
-.002
(.008)
**
*
***
*
*
.94 ***
(.33)
-.25 **
(.09)
.14
(.10)
.12
(.06)
-.004
(.002)
2.43 ***
(.35)
.68
(.39)
-.02
(.01)
-.003
(.008)
Model 5
-2.09
(1.04)
-.34
(.48)
-.45
(.36)
1.05
(.34)
-.28
(.09)
.33
(.13)
.15
(.06)
-.005
(.002)
2.48
(.35)
.67
(.39)
-.03
(.01)
-.0005
(.008)
Model 6
*
-2.53 *
(1.02)
**
1.02
(.34)
-.23
(.09)
.28
(.12)
.15
(.06)
-.004
(.002)
2.60
(.36)
.78
(.41)
-.02
(.01)
-.10
(.03)
.01
(.004)
-3.20
(1.45)
***
*
*
*
***
Ownership * TRS
Constant
-3.21 *
(1.35)
-4.18 ***
(1.30)
-4.25 ***
(1.30)
-3.79 **
(1.33)
-2.73 *
(1.40)
N
Hit rate a
Chi square
Df
468
85.47
88.62 ***
23
467
85.65
86.37 ***
23
467
86.3
87.33 ***
23
468
86.32
93.72 ***
23
466
86.27
98.92 ***
26
* p  .05 ** p  .01 *** p  .001
a Expected hit rates from a random model range from 72.41 to 72.51.
Industry control variables not shown. Standard errors are in parentheses.
35
Model 7
**
*
*
*
*
***
**
**
*
468
86.54
105.65 **
25
-2.48
(1.05)
-.17
(.50)
-.51
(.37)
1.07
(.35)
-.24
(.09)
.36
(.13)
.15
(.06)
-.005
(.002)
2.60
(.36)
.77
(.41)
-.02
(.01)
-.09
(.03)
.01
(.004)
-3.27
(1.46)
*
**
**
**
*
*
***
**
**
*
466
87.12
107.35 ***
27
Table 9. Logistic regression estimates of CEO turnover in non-manufacturing firms
Variable
Relative salary
Model 1
Model 2
Model 3
-.77
(1.49)
Relative bonus
-.07
(.09)
.07
(.10)
.04
(.06)
-.003
(.002)
1.96 ***
(.35)
-.26
(.31)
-.02
(.02)
.003
(.007)
-.005
(.34)
-.10
(.08)
.05
(.10)
.06
(.06)
-.003
(.002)
1.98 ***
(.35)
-.29
(.31)
-.02
(.02)
.0002
(.007)
-.59 *
(.26)
Relative restricted stock grants
-.60 *
(.26)
Constant
-.79
(1.97)
-1.52
(1.71)
-1.04
(1.72)
-1.32
(1.68)
-1.25
(2.12)
N
Hit rate a
Chi square
Df
531
85.31
74.69 ***
36
528
84.85
74.88 ***
36
511
83.95
78.38 ***
35
531
85.31
74.44 ***
36
509
84.09
78.78 ***
38
511
85.32
80.99 ***
36
CEO tenure
CEO tenure squared
Retirement
Chairman
Return on assets
Shareholder return (TRS)
-.10
(.08)
.04
(.11)
.07
(.06)
-.003
(.002)
2.04 ***
(.35)
-.29
(.31)
-.01
(.02)
.00009
(.007)
Model 6
-.06
(.08)
.10
(.11)
.05
(.06)
-.003
(.002)
2.08 ***
(.36)
-.31
(.32)
-.02
(.02)
-.04
(.03)
.005
(.003)
-1.42
(1.73)
Size
Grants
-.10
(.08)
.08
(.11)
.07
(.06)
-.003
(.002)
2.01 ***
(.35)
-.29
(.31)
-.02
(.02)
.00007
(.007)
Model 5
-.04
(1.84)
.24
(.35)
-.60 *
(.27)
.06
(.35)
-.06
(.09)
.06
(.13)
.05
(.06)
-.003
(.002)
2.02 ***
(.36)
-.28
(.32)
-.02
(.02)
.003
(.008)
.18
(.34)
Relative stock options
CEO ownership
Model 4
Ownership * TRS
* p  .05 ** p  .01 *** p  .001
a Expected hit rates from a random model range from 71.75 to 72.22.
Industry control variables not shown. Standard errors are in parentheses.
36
Model 7
-.07
(1.84)
.23
(.35)
-.60 *
(.27)
.05
(.35)
-.06
(.09)
.07
(.13)
.05
(.06)
-.003
(.002)
2.11 ***
(.37)
-.30
(.32)
-.02
(.02)
-.03
(.03)
.004
(.003)
-1.38
(2.12)
509
85.07
80.10 ***
39
CEO turnover probability
0.8
0.6
0.4
0.2
-50
-25
sh
0
ar
eh
25
ol
de
rr
50
et
ur
75
n
100
4
2
8
6
CEO
10
r sh
owne
12
ip ( lo
14
g)
Figure 1. Interaction effect of shareholder return and ownership on CEO turnover
37