Rank Order Tournaments and Incentive Alignment: The Effect on Firm Performance

Kale, Jayant R.; Reis, Ebru; Venkateswaran, Anand

doi:10.2139/ssrn.1095389

Cited by 162 publications

(380 citation statements)

References 72 publications

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“…On the other hand, when using the absolute tournament measure (CEO PAY GAP), we find the structure to become steeper in large firms. This result is consistent with earlier findings for U.S. firms (Kale et al (2009)). …”

Section: Firm Characteristic Determinants Of Ceo Tournament Structsupporting

confidence: 94%

“…4 These are consistent with Hofstede's (1980) arguments that differences in culture would be expected to influence how individuals think about corporate power structures and income inequality. Thus, we expect culture, that is, shared value, to affect decisions on compensation, and since culture varies across 2 Specifically, Kale et al (2009) find support for the empirical implications of tournament theory in U.S. data with their empirical evidence that firm value is positively associated with a measure of firm tournament structure. In contrast, other empirical research in the United States, for example, Rajgopal and Srinivasan (2006) and Bebchuk et al (2011), using different data and measures, concludes that tournament pay is either not associated or negatively associated with higher firm value.…”

Section: Introductionmentioning

confidence: 75%

“…However, previous research based on single country analyses presents conflicting results regarding the association of firm value with CEO tournaments, with some finding a positive association (e.g., Kale et al (2009)) and others finding no association or a negative association (e.g., Rajgopal and Srinivasan (2006), Bebchuk, Cremers, and Peyer (2011)). 2 In this paper, we examine the CEO tournament structure across countries, incorporating cultural differences into the analysis.…”

Section: Introductionmentioning

confidence: 95%

“…This competition to win the tournament is the catalyst in tournament theory for higher effort and more payoffs for firms (e.g., Lazear and Rosen (1981), Green and Stokey (1983), and Kale et al (2009)). While Thomas (2004) confines his argument more broadly to differences between the United States and other countries, the same argument can be extended to differences across countries.…”

Section: Introductionmentioning

confidence: 99%

“…We use several measures of a firm's tournament structure: the CEO PAY RATIO, which is the ratio of the CEO's compensation to the mean (median) of the other highest paid executives; the CEO PAY GAP, which is the absolute dollar difference in pay between the CEO and the average of the firm's next three highest paid executives (Bognanno (2001), Henderson and Fredrickson (2001), and Kale et al (2009)); and the CEO PAY SLICE, which is the percentage the CEO claims of the total compensation to the top executive group (Bebchuk et al (2011)). These tournament measures are primarily focused on internal promotions to CEO, which is in line with previous CEO succession studies that find the majority of CEOs are appointed from managers internal to the firm (e.g., Parrino (1997), Huson, Parrino, and Starks (2001) and Agrawal, Knoeber, and Tsoulouhas (2006)).…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences

Burns¹,

Minnick

Starks

2017

J. Financ. Quant. Anal.

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Using a cross-country sample, we examine the chief executive officer (CEO) tournament structure (measured alternatively as the ratio and the difference of pay between the CEO and other top executives within a firm). We find the tournament structure to vary systematically with firm and country cultural characteristics. In particular, firm size and the cultural values of power distance, fair income differences, and competition are significantly associated with variations in tournament structures. We also establish support for the primary implication of tournament theory in that tournament structure tends to be positively related to firm value, even after controlling for endogeneity.

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Section: Firm Characteristic Determinants Of Ceo Tournament Structsupporting

confidence: 94%

Section: Introductionmentioning

confidence: 75%

Section: Introductionmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences

Burns¹,

Minnick

Starks

2017

J. Financ. Quant. Anal.

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Pay dispersion among the top management team and outside directors: Its impact on firm risk and firm performance

Patel

Triana

et al. 2017

Human Resource Management

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Two key groups central to improving firm performance are the top management team (TMT) and the board of directors. Executives undertake strategic actions, whereas board members fulfill their resource provision and monitoring roles. Drawing on tournament theory and equity theory, we propose that high pay dispersion among outside directors and the TMT is positively associated with strategic risk, whereas high (low) TMT pay dispersion and low (high) outside director pay dispersion are positively associated with firm performance. Our predictor is the unexplained component of horizontal pay dispersion, or the residual of pay dispersion resulting from regressing pay on observable firm, industry, period, and individual characteristics. Our results highlight the importance of unexplained pay dispersion for TMTs, but not for boards of directors, in improving firm performance. K E Y W O R D Sdual-agency framework, pay dispersion, performance, relative deprivation, strategic risk, tournament theory

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The social context of compensation design: Social norms and the impact of equity incentives

Zolotoy

O’Sullivan

Martin

2018

Human Resource Management

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Drawing on arguments from institutional theory, this study examines how social norms—specifically, local religious social norms—affect the motivational impact of equity‐based incentives. We test our model using longitudinal data on local religious norms, CEO equity incentives, and firm value. Consistent with our theoretical predictions, we find that local religious social norms attenuate the impact of CEO option incentives upon firm value. Furthermore, we find that the attenuating impact of local religious social norms increases with managerial discretion. These findings provide valuable insight for human resource professionals aiming to design compensation contracts for employees that are aligned with firm goals. Our findings also contribute to research on the motivational effect of equity incentives by demonstrating the importance of considering the social context in which executives are embedded.

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Rank Order Tournaments and Incentive Alignment: The Effect on Firm Performance

Cited by 162 publications

References 72 publications

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences

Pay dispersion among the top management team and outside directors: Its impact on firm risk and firm performance

The social context of compensation design: Social norms and the impact of equity incentives

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