Incentives in Managerial Pay and Voluntary Turnover

Abstract

We study the retention and allocation of managerial talent by examining the effect of equity-based compensation and promotion- based tournament incentives on voluntary turnover among non-CEO managers. We use a unique hand-collected dataset of over 3,000 managerial turnovers in which about a third are voluntary resignations and find that higher stock-based alignment incentives aid in retaining managers, whereas higher tournament incentives appear to increase turnover. We also find that firms with greater inequality in their compensation schemes are more likely to experience higher resignations, and that managers take into account their compensation relative to their peers in the firm and outside the firm in making their resignation decisions. Our results indicate that pay inequity aversion on the part of managers is an important consideration for retaining managers. Finally, we find that higher-paid managers are more likely to resign and present evidence that the higher pay likely indicates higher managerial ability.

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