Tournament Incentives and Firm Operational Efficiency

49 Pages Posted: 15 May 2024

See all articles by Md Reiazul Haque

Md Reiazul Haque

The University of Manchester

Bobae Choi

University of Newcastle (Australia) - Newcastle Business School

Doowon Lee

Newcastle Business School

Sue Wright

UTS Business School; Financial Research Network (FIRN)

Abstract

We document new evidence that the gap in total compensation between the chief executive officer (CEO) and other top executives (VPs) is negatively associated with firm operational efficiency. While prior research finds that such a pay gap, known as a tournament incentive, incentivizes VPs to adopt riskier investment policies, we show that a high pay gap is counterproductive to firm efficiency. The negative association with operational efficiency holds under a series of robustness tests, including regressions with alternative measures for pay gap and additional control variables, firm fixed effects and instrumental variables regression, and change analysis. We show that the negative impact of pay gap on operational efficiency stems from two channels: (i) inefficient decisions about inputs that determine efficiency and (ii) the propensity for overinvestment in tangible and intangible assets. Our evidence confirms concerns expressed in the market that high pay gaps can have adverse effects on overall business performance.

Keywords: tournament incentive, Operational Efficiency, tournament theory

Suggested Citation

Haque, Md Reiazul and Choi, Bobae and Lee, Doowon and Wright, Sue, Tournament Incentives and Firm Operational Efficiency. Available at SSRN: https://ssrn.com/abstract=4829081 or http://dx.doi.org/10.2139/ssrn.4829081

Md Reiazul Haque

The University of Manchester ( email )

United Kingdom

HOME PAGE: http://https://www.research.manchester.ac.uk/portal/mdreiazul.haque.html

Bobae Choi

University of Newcastle (Australia) - Newcastle Business School ( email )

Callaghan
Newcastle
Australia

Doowon Lee

Newcastle Business School ( email )

1 University Drive
Callaghan
Newcastle, NSW
Australia
+61 2 4921 8620 (Phone)

Sue Wright (Contact Author)

UTS Business School ( email )

Sydney
Australia

Financial Research Network (FIRN) ( email )

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

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