Are Big Ponds Better? How Local Labor Markets Moderate Compensation Comparison Effects on TMT Turnover

Abstract

We formulate and test a theory explaining how local labor markets moderate the effects of pay comparisons on turnover among non-CEO top management team (TMT) members. Sampling S&P 1500 TMT members, we find that dense local labor markets for executives weaken the effects of social comparisons and CEO tournaments on TMT member turnover by providing more job alternatives and decreasing switching costs. We also find that pay comparisons with other TMT members in the local area are most salient in dense labor markets, increasing higher-paid TMT members’ labor market visibility (signaling their worth externally) and their subsequent turnover. Our theory and findings thus identify local labor markets as a highly relevant boundary condition for TMT turnover decisions, as TMT members more readily quit when residing in communities where jobs are plentiful and offer higher pay than their current employment.