CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences and Consequences

Abstract

Using a cross-country sample, we examine the chief executive officer (CEO) tournament structure (measured alternatively as the ratio and the difference of pay between the CEO and other top executives within a firm). We find the tournament structure to vary systematically with firm and country cultural characteristics. In particular, firm size and the cultural values of power distance, fair income differences, and competition are significantly associated with variations in tournament structures. We also establish support for the primary implication of tournament theory in that tournament structure tends to be positively related to firm value, even after controlling for endogeneity.

Say on Pay Laws, Executive Compensation, CEO Pay Slice, and Firm Value Around the World

“…Panel B of Table 1 provides summary statistics for our CEO compensation and control variables used in the regression analysis. The average total CEO pay is $1.24 million, which is lower than the $2 million average reported in Burns et al (2013) and $4.2 million Fernandes et al (2013). A close inspection of this statistics suggests that lower average CEO pay in our sample is mostly due to the larger sample size and a higher proportion of smaller firms than in other studies.…”

“…Our paper also adds to the rich literature on the relation between shareholder influence and executive compensation, as we think of SoP laws as a shareholder empowerment mechanism that may better align the interests of managers and shareholders. In this aspect, our paper contributes to the nascent group of cross-country studies on executive compensation using the largest sample on executive compensation to date (Fernandes, Ferreira, Matos, and Murphy (2013), Burns, Minnick, and Starks (2013), Bryan, Nash, and Patel (2010)). Our paper is also related to studies on the effectiveness of firm-level measures of shareholder influence such as shareholder proposals and the associated voting outcomes on governance provisions (e.g., Cai et al (2009), Ertimur, Ferri, and Muslu (2011), Iliev, Lins, Miller, and Roth (2012)).…”

“…There are two main sources of managerial compensation data for cross-country studies: S&P's Capital IQ (CIQ) and BoardEx. Earlier studies such as Fernandes et al (2013), Ferri and Maber (2013), and Ozkan, Singer, and You (2013) focus on BoardEx, but more recent studies like Balsam, Gordon, Li, and Runesson (2013) and Burns et al (2013) use CIQ. Our comparison of the two datasets results in favor of CIQ in terms of coverage.…”

“…Following Bebchuk et al (2011) we define CPS as the percent of total annual compensation of the five highest-paid managers claimed by the CEO. A similar measure is pay gap, which is the difference between total CEO pay and the median value of annual compensation of the five highest-paid managers (e.g., Kale, Reis, and Venkateswaran (2009), Burns et al (2013)). A higher portion of the top management pay captured by the CEO can be a result of the relative talent of the CEO or the relative power of the CEO.…”

Internal managerial promotions: Insider incentives and CEO succession

“…A common measure for the degree of tournament incentives used in recent empirical literature is the pay gap between the CEO and the median compensation of the executive team (e.g. Kale et al (2009); Kini and Williams (2012) and Burns et al (2012)). This method correctly asserts that the larger the pay gap the greater the tournament incentives (i.e.…”