Executive Turnover Revisited From an Efficiency Wage Perspective

Executive Turnover Revisited From an Efficiency Wage Perspective We develop theoretical arguments from the efficiency wage model (Shapiro & Stiglitz, 1984) to provide better understanding of Fama’s (1980) seminal notion that executive labor markets contribute to the alignment of executive and shareholder interests. We show how the efficiency wage model can be integrated with several other theories of executive turnover. Furthermore, the model allows for predictions that have received very little analysis to date, such as the effect of firm risk and executive salaries on turnover. We test predictions from the model on a sample of executives from 280 manufacturing firms observed annually from 1986 to 1992. Our sample includes data on over 12,000 observations and nearly 1,700 employment terminations. The results are consistent with the main predictions of the efficiency wage model. Holding performance constant, boards of directors are less patient with (more likely to dismiss) executives who have lower salaries and those in higher risk firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research: The Journal of the Iberoamerican Academy of Management Emerald Publishing

Executive Turnover Revisited From an Efficiency Wage Perspective

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Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
1536-5433
DOI
10.1108/15365430480000727
Publisher site
See Article on Publisher Site

Abstract

We develop theoretical arguments from the efficiency wage model (Shapiro & Stiglitz, 1984) to provide better understanding of Fama’s (1980) seminal notion that executive labor markets contribute to the alignment of executive and shareholder interests. We show how the efficiency wage model can be integrated with several other theories of executive turnover. Furthermore, the model allows for predictions that have received very little analysis to date, such as the effect of firm risk and executive salaries on turnover. We test predictions from the model on a sample of executives from 280 manufacturing firms observed annually from 1986 to 1992. Our sample includes data on over 12,000 observations and nearly 1,700 employment terminations. The results are consistent with the main predictions of the efficiency wage model. Holding performance constant, boards of directors are less patient with (more likely to dismiss) executives who have lower salaries and those in higher risk firms.

Journal

Management Research: The Journal of the Iberoamerican Academy of ManagementEmerald Publishing

Published: Apr 1, 2004

Keywords: Efficiency wage model; Labour markets; Executive turnover; Risk; Salary

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