East Lansing, Mich. – In a recent study of forced turnover among chief executive officers and top executives of 443 large firms, two finance professors from Michigan State University’s The Eli Broad College of Business found both classes of managers face dismissal at about the same rate, but that non-CEO firings can’t be as closely related to a firm’s stock performance as CEO firings can be.
According to associate professors Charles J. Hadlock and C. Edward Fee, their study, “Management Turnover Across the Corporate Hierarchy,” in the Journal of Accounting and Economics, indicates that firms do continually eliminate underperforming executive personnel, but factors that are more subtle than stock price may affect the tenure of non-CEOs.
In fact, they found that when CEOs lose their jobs, their immediate subordinates are very likely to be fired, particularly if the new boss is an outsider.
“This evidence suggests that the value of a manager to the firm very much depends on the identity of those who are around the CEO in other words, managers are being evaluated as a team,” said Hadlock.
In their study, Hadlock and Fee also found that while a significant number of dismissed executives eventually landed new jobs, the positions they got were inferior to their old positions, based on such metrics as compensation and firm size.
“Executives directly below the CEO certainly do not appear to have quiet lives,” said Hadlock. “If they lose their positions, the consequences can be severe, and thus they should have strong incentives to take actions that allow them to maintain their positions. The most effective way to do this is to help keep the CEO in office, either by increasing firm performance or taking actions that entrench the CEO.”