Executive Compensation and Tournament Theory: Empirical Tests on Danish Data

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. This article adds to the empirical literature on tournament theory as a theory of executive compensation. I test several propositions of tournament models on a rich data set containing information about 2,600 executives in 210 Danish firms during a 4-year period. I ask, Are pay differentials between job levels consistent with relative compensation? Is pay dispersion between levels higher in noisy environments? Is the dispersion affected by the number of tournament participants? Is average pay lower in firms with more compressed pay structures? Does wider pay dispersion enhance firm performance? Most of the predictions gain support in the data.

Tournaments and managerial incentives in China's listed firms: New evidence

“…For a more formal theoretical argument, see Schmidt and Schnitzer (1993). 10 For a similar view, see Schipani and Liu (2001 Eriksson (1999), we measure the prize of promotion tournament, PRIZE, by log of the ratio of the average compensation for level I executives to the average compensation for level II executives. We assume that level II executives are competing for promotion to level I positions.…”

“…13 As presented in the previous section, we hypothesize that the well-functioning promotion tournament is still non-existent in Chinese listed firms that are owned and controlled by the state, whereas the efficient promotion tournament which generates adequate incentive for tournament contestants can be found in China's listed firms that are privatized. Specifically, we modify the empirical tournament model by Eriksson (1999) to reflect the important reality of Chinese listed firms (the continued ownership and control by the state for many listed firms in China). We then estimate the augmented tournament model using the aforementioned data:…”

“…where POOL is the size of the tournament pool, measured by the total number of level-II executives; NOISE is the coefficient of variation of sale over the previous three years (a similar measure was used by Eriksson, 1999) 14 ; STATE is the proportion of shares owned by the state (in percent); Z is a vector of control variables; α, β, γ, δ, ρ, and τ are the coefficients to be estimated; θ is a column vector of coefficients on the control variables; and u is the disturbance term which we assume u ~ NID(0, σ 2 ). For Z, our data allow us to consider firm age, firm size (measured by log of sales), industry dummy variables, and year dummy variables which control for year-specific common macro shocks to all listed firms.…”

“…al., 1993, Baker and et. al., 1994, Knoeber and Thurman, 1995, Drago and Garvey, 1998, Eriksson, 1999, Bognanno, 2001, Agrawal and et., al., 2004, and Audas, 2004, we begin with two previously-tested empirical predictions from the tournament model: (i) the prize of the tournament (the salary gap between the top executive and the other contestants) rises with the number of contestants in the tournament pool; and (ii) the prize of the tournament is greater in firms facing more volatile market conditions (and hence managers having less control over their performance). 1 We then examine the effect of ownership structure on the sensitivities of the tournament prize to the size of the contestant pool and market volatility.…”

How Uncertainty and Ambiguity in Tournaments Affect Gender Differences in Competitive Behavior

“…2009;Gill and Prowse, 2014;Almås et al, 2016) and that women shy away from competition much more often than men (seminal paper by Niederle and Vesterlund, 2007; see also Booth and Nolen, 2012;Datta Gupta et al, 2013;Brandts et al, 2014;Buser et al 2014;Sutter and Glätzle-Rützler, 2015;Flory et al, 2015;Saccardo et al 2017).2 Since firms often use tournament payment and promotion schemes (Eriksson, 1999;Bognanno, 2001), a lower inclination of women towards competition can help explain to some extent why they are less often promoted and end up with lower wages.3 Providing empirical evidence in this vein, McGee et al (2015) show on the basis of US data that women are less likely than men to be remunerated with a competitive compensation package and that this can explain part of the wage gap between the two genders.…”