Execs Passed Over for CEO Find Better Jobs

Those who lose out as chief executive often move on — and up — with another company, new research shows.

Based on the research of Eric Chan

Toward the end of 2019 at The Walt Disney Co., a behind-the-scenes contest raged for its top corporate prize: succeeding Bob Iger as CEO. The chief contenders were Bob Chapek, who chaired its theme parks and cruise lines, and Kevin Mayer, who oversaw its streaming services and overseas media.

On Feb. 25, 2020, Chapek was named the new chief executive officer. Within three months, Mayer had left Disney for another media company, taking the CEO title at social media app TikTok.

That’s a common pattern, according to new research by Eric Chan, assistant accounting professor at Texas McCombs. Within a year after a CEO tournament ends, 34% of contenders who don’t become CEO leave their employer. But many of the most skilled and experienced end up as leaders of other companies.

“High-ability executives who are not promoted will leave because there are better opportunities outside,” Chan says.

“As long as you have talent and experience, not being promoted is not the end of the world.” — Eric Chan

What Do the Losers Do?

Chan has long been interested in the processes around promotions. Previous research by others had found that CEO tournaments created incentives for better performance. “The possibility of a promotion is a carrot to work harder,” he says.

But what happens to the ones who don’t get the carrot? Without the top job to motivate them, Chan theorized, many are motivated to look at other companies.

He also wondered how receptive other companies would be. “Does the external labor market treat them as losers?” he asks. “Or does it believe that these are talented people with a lot of good experience who can really contribute to another company?” he asks.

With John Harry Evans III of the University of Pittsburgh and Duanping Hong of Kennesaw State University, Chan gathered data on executive compensation and turnover for all S&P 1500 companies from 2002 to 2016. For that period, the researchers analyzed 1,575 CEO tournaments involving 6,393 executives — of whom 75% didn’t win.

To sort out the most high-ability among those not chosen, they estimated each executive’s chances of winning a CEO contest, based on how similar their résumés were to those of the actual winners. The top half of those not picked, they found, were eight times as competitive as the lower half.

“They had many qualities in common with the ones who actually did get promoted,” says Chan. “It just happens that they didn’t get the job.”

Losers Become Winners

Once they’d lost, the researchers found, the most able executives had multiple disincentives to stick around.

One was financial. By not becoming CEO, they missed out on an average jump in annual total pay of 190% or about $3 million. If they stayed on, they got much smaller raises, averaging 5.8%.

Another disincentive was that they would have to wait five years, on average, before getting another shot at the CEO’s seat. But even if they wait, their chance of promotion drops the next time around.

To Chan, the surprise was not that a third of them left, but how many of them moved to better jobs within a year:

· Of those who left, 46% joined bigger companies.

· They boosted their salaries by an average of 33%.

“Things can work out well for them, even if they don’t get the job that they tried to fight for.” — Eric Chan

Lessons on Leaving

The research offers comfort for executives who don’t win the CEO’s seat, Chan says.

Another lesson is for corporate recruiters seeking C-suite talent, he suggests. Look at companies that have just named a CEO, because top-notch executives may be looking to jump ship.

For the companies those executives leave behind, there’s a cost, Chan says. They lose the knowledge, relationships, and networks those executives had accumulated.

There’s one way to slow such losses, the study found: Don’t have a competition. When one person was already named the heir apparent, high-ability executives were 30% less likely to leave within a year after a CEO change. There’s less stigma in losing if there’s no real contest, Chan says.

An alternate approach might sound tempting: Offer bigger raises to the executives not chosen, if they’ll stay. But Chan warns the tactic might backfire by reducing incentives for the next CEO contest.

“It wouldn’t make sense if I’ve lost the tournament, and I’m still getting paid almost as much as the CEO.” — Eric Chan

In the end, he believes, the benefits of competing to select the best possible CEO probably outweigh the drawbacks of letting the second-best walk away. “Tournaments work very well in terms of motivating people,” says Chan. “At the end, some good people are going to leave, and that’s just the way it goes.”

“Losers of CEO Tournaments: Incentives, Turnover, and Career Outcomes” is published in The Accounting Review.

Story by Steve Brooks