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Rank‐Order Tournaments and Incentive Alignment: The Effect on Firm Performance
Author(s) -
KALE JAYANT R.,
REIS EBRU,
VENKATESWARAN ANAND
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01470.x
Subject(s) - incentive , tournament , endogeneity , equity (law) , order (exchange) , microeconomics , executive compensation , chief executive officer , business , promotion (chess) , rank (graph theory) , economics , econometrics , finance , management , political science , mathematics , combinatorics , politics , law
We investigate simultaneously the impact of promotion‐based tournament incentives for VPs and equity‐based (alignment) incentives for VPs and the chief executive officer (CEO) on firm performance. We find that tournament incentives, as measured by the pay differential between the CEO and VPs, relate positively to firm performance. The relation is more positive when the CEO nears retirement and less positive when the firm has a new CEO, and weakens further when the new CEO is an outsider. Our analysis is robust to corrections for endogeneity of all our incentive measures and to several alternative measures of tournament incentives and firm performance.