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

Journal of Finance Vol. 64, pp. 1479-1511, 2009

Posted: 18 Jan 2011

See all articles by Jayant R. Kale

Jayant R. Kale

Northeastern University

Ebru Reis

Istanbul Bilgi University

Anand Venkateswaran

Northeastern University - Finance and Insurance Area

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

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.

Keywords: Tournaments, Compensation, Pay Gay, Firm Performance

Suggested Citation

Kale, Jayant Raghunath and Reis, Ebru and Venkateswaran, Anand, Rank-Order Tournaments and Incentive Alignment: The Effect on Firm Performance (2009). Journal of Finance Vol. 64, pp. 1479-1511, 2009, Available at SSRN: https://ssrn.com/abstract=1742423

Jayant Raghunath Kale

Northeastern University ( email )

Boston, MA 02115
United States

Ebru Reis

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

Anand Venkateswaran (Contact Author)

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States

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