Losers of CEO Tournaments: Incentives, Turnover, and Career Outcomes

Abstract

We investigate the consequences for non-promoted executives (NPEs) in CEO tournaments. We find that NPEs’ total incentives decrease following the end of a tournament based on evidence of their reduced future promotion prospects and limited adjustments to their compensation. Consistent with the theory that NPEs leave in response to this loss in incentives, results indicate that turnover is higher for NPEs who: 1) are ex ante more competitive for promotion, 2) compete in open tournaments without an heir apparent versus closed tournaments with an heir apparent winner, and 3) compete in tournaments with an outsider versus insider winner. Departed NPEs’ subsequent career outcomes suggest that the labor market assesses NPEs who leave after open tournaments more favorably than those who leave after closed tournaments and tournaments with an outsider winner. Overall, evidence suggests that promotion tournaments can weed out low-quality managers but also cause the unintended turnover of high-quality managers.

Internal Mobility: A Review and Agenda for Future Research

“…For instance, when there are more prizes (i.e., more promotion opportunities) employees tend to decrease effort and when there are more employees vying for the promotion, employees tend to increase effort (Orrison, Schotter, & Weigelt, 2004). This suggests that not all promotion tournaments will result in desirable motivational increases (DeVaro, 2006), meaning organizations should carefully consider the design of such tournaments to avoid detrimental effects noted in literature on top-management teams, such as increased turnover (e.g., Chan, Evans, & Hong, 2022), unproductive sabotage from competitors (Chen, 2003), or selective shirking on tasks deemed irrelevant to their promotion chances (DeVaro & Gürtler, 2016).…”

“…A second opportunity for future research includes clarifying the most effective way to design promotions in cases where promotion opportunities are limited. Although prior work has focused on competitive processes (i.e., promotion tournaments; DeVaro, 2006), it is likely that promotion tournaments can have unintended consequences-including losing high performers (Chan et al, 2022). Further, while researchers have begun to investigate the most effective ways to design these tournaments (Orrison et al, 2004), there may be yet unexplored elements including if and when organizations communicate that individuals are part of the tournament, how early promotion tournaments should start, and if such tournaments are uniformly effective in different job industries, organizational cultures, and job roles.…”

Promote Internally or Hire Externally? The Role of Gift Exchange and Performance Measurement Precision

“…Although internal promotions are more common, we observe in practice that external candidates are frequently hired over internal candidates (Bidwell [2011], Gregory‐Smith and Wright [2019], Chan, Evans, and Hong [2022]). One major reason is that the external labor pool is almost always larger than the internal labor pool.…”