Compensation Gaps Among Top Executives: Evidence of Tournament Incentives or Productivity Differentials?

58 Pages Posted: 15 Mar 2012

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Shage Zhang

Trinity University

Date Written: February 1, 2012

Abstract

We explore the determinants of the compensation gaps between the CEO and other senior executives by comparing two competing theories based on optimal contracting, namely tournament theory and productivity theory. We find little evidence that firms design their executive compensation policies in manner consistent with tournament theory. Our strongest evidence against tournament theory is found when a succession contest is most likely to occur, such as prior to CEO turnovers and CEO retirements in particular, and also in firms that are most likely to conduct a contest for selecting their next CEO. Empirically, we find that tournament predictions have weak explanatory power in these samples. In contrast, we find substantial evidence that executive compensation is strongly linked to measures of senior executive productivity, and that productivity differentials among senior executives explain a large part of firm compensation gaps.

Keywords: compensation gap, executive compensation, tournament, productivity, agency theory

JEL Classification: J30, J33, G35

Suggested Citation

Masulis, Ronald W. and Zhang, Shage, Compensation Gaps Among Top Executives: Evidence of Tournament Incentives or Productivity Differentials? (February 1, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2021584 or http://dx.doi.org/10.2139/ssrn.2021584

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Shage Zhang (Contact Author)

Trinity University ( email )

San Antonio, TX 78212
United States

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