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

77 Pages Posted: 7 Jun 2013

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales, Sydney; 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: May 21, 2013

Abstract

We explore the determinants of compensation gaps between a firm’s CEO and its other top executives, and compare the ability of two competing optimal contracting theories, namely tournament theory and productivity theory, to explain the cross sectional variability in these gaps across firms. We find little evidence that firms design their executive compensation policies in a manner consistent with tournament theory. Our strongest evidence against tournament theory is from firms most likely to conduct tournament contests for selecting CEOs, which is prior to CEO turnovers, especially planned retirements, and in industries where firm-specific human capital is high. Empirically, we find that tournament predictions have weak explanatory power in these samples. In contrast, we find robust evidence that compensation is strongly linked to senior executives’ productivity measures, and that productivity differences among executives explain a large part of the cross sectional and time series variability in 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? (May 21, 2013). FIRN Research Paper. Available at SSRN: https://ssrn.com/abstract=2275455 or http://dx.doi.org/10.2139/ssrn.2275455

Ronald W. Masulis

University of New South Wales, Sydney ( 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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