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

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

doi:10.2139/ssrn.1095389

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

62 Pages Posted: 25 Feb 2008

See all articles by Jayant R. Kale

Anand Venkateswaran

Northeastern University - Finance and Insurance Area

There are 2 versions of this paper

Date Written: November 2007

Abstract

In this article, we study the effectiveness of promotion-based tournament incentives. We simultaneously investigate tournament incentives for the VP and performance- or equity- based (alignment) incentives for the VP and the CEO. We find that tournament incentives, as measured by the pay differential between the CEO and VPs, relate positively to firm performance. We show that the effect of tournament incentives on firm performance is weaker when the firm has a new CEO and more so when the new CEO is an outsider, and when the firm belongs to a homogeneous industry. On the other hand, tournament effects are stronger when the CEO is close to retirement. Our analysis is robust to corrections for endogeneity of all our incentive measures as well for several alternate measures of tournament incentives and firm performance.

Keywords: Managerial incentives, Tournaments, Executive compensation, Firm performance

JEL Classification: G34, G35, J33, L14, L35

Suggested Citation: Suggested Citation

Kale, Jayant Raghunath and Reis, Ebru and Venkateswaran, Anand, Rank Order Tournaments and Incentive Alignment: The Effect on Firm Performance (November 2007). Available at SSRN: https://ssrn.com/abstract=1095389 or http://dx.doi.org/10.2139/ssrn.1095389