The Effects of CEO Certification and the Subsequent Compensation Changes on TMT Turnover : An Equity Theory Perspective

In this study, we investigated the linkage between a CEO winning the certification award (i.e., "CEO of the Year" prize awarded annually by various business presses), and turnover among top management team (TMT). Drawing from the social comparison theory, we focused on the changes in executive pay disparity following CEO certification and examined their impact on turnover among the senior managers. Based on 14 years of panel data on 146 winning CEOs of Business Week's CEO of the Year Award, we found that the non CEO top managers tend to exit firms following CEO certification because of perceived inequity. However, the relationship was curvilinear. The effect was most prominent with moderate levels of inequity; when the inequity is very low or high, however, TMT members cease to compare themselves with their CEOs rather than quit their positions. Our findings highlight the importance of compensation schemes of TMT in retaining both competent CEO and other TMT members.