AUSTIN, Texas — Recently missed out on a big promotion opportunity? Don’t sweat it. New research from The University of Texas at Austin reports that as long as you’re talented and qualified, a similar outside opportunity will find its way to you soon enough.
Whenever a CEO position becomes available, it’s common for companies to encourage senior executives to apply for the promotion. These internal CEO contestants can only have one winner, though, so what happens to the rejected internal applicants? Study authors investigated this topic, and find that in the vast majority of cases it doesn’t take long for similar opportunities to arise from outside the organization.
“As long as you have talent and experience, not being promoted is not the end of the world,” study author Eric Chan, an assistant accounting professor at UT Austin’s McCombs School of Business, says in a university release. “The possibility of a promotion is a carrot to work harder.”
Researchers assessed 1,575 CEO tournaments involving 6,393 executives over a span of 14 years to reach this conclusion. Notably, 34 percent of examined executives who weren’t selected for an internal CEO job ended up leaving their company within one year. Instead, many (46%) assumed leadership roles in new companies.
The prospect of an internal promotion is a major motivator for CEO candidates, Chan explains. When the “tournament” is over, however, those passed over usually take a step back and consider their career options.
In collaboration with Harry Evans from the University of Pittsburgh and Duanping Hong from Kennesaw State University, Prof. Chan put together a comprehensive dataset examining executive compensation and turnover among all S&P 1500 companies between 2002 and 2016.
An analysis of that data revealed a number of interesting findings. For instance, rejected internal CEO candidates missed out on an average pay increase of 190 percent ($3 million). Also, if a passed-over candidate decided to stick with their employer, they usually had to wait an average of five years before getting another shot at becoming CEO. Similarly, passed over candidates were less likely to be promoted at all if they stayed with their company.
Generally speaking, these are high-quality job candidates. Other employers genuinely considered their skills attractive and wanted to interview them. Among the résumés of those not selected for CEO positions, researchers found that the top half of candidates were eight times as competitive as the lower portion.
“They had many qualities in common with the ones who actually did get promoted,” Prof. Chan adds. “It just happens that they didn’t get the job.”
Another strong indicator that many high-quality internal candidates are passed over: Workers who switched companies enjoyed an average raise of 33 percent. In comparison, those who stayed loyal only received an average raise of 5.8 percent.
“Tournaments may work well in terms of motivating people,” Chan concludes. “But in the end, some high-ability executives who are not promoted will leave, because there are better opportunities outside. The external labor market agrees that these are talented people with a lot of good experience that can really contribute to another firm.”
The study is published in The Accounting Review.