CEO–TMT vertical pay gap and firm productivity: A tournament theory perspective

Le Xu, Ajay Rama Ponnapalli and Chen Wang

Journal of Business Research, 2025, vol. 197, issue C

Abstract: Does the pay gap between the CEO and TMT members influence how firms perform? For long, this question has been of scholarly interest yet prior research exploring it has largely yielded equivocal findings. One possible reason for this is the way firm performance is traditionally operationalized. Addressing past equivocal findings, we instead examine the influence of the CEO–TMT vertical pay gap on firm productivity, which is a more immediate reflection of TMT members’ effort that is motivated by the CEO–TMT vertical pay gap. Drawing on tournament theory, we theorize that a greater CEO–TMT vertical pay gap will lead to higher firm productivity. We also explore boundary conditions around this relationship by examining the influence of external and internal promotional opportunities for TMT members. Specifically, we contend that this positive relationship will be stronger when firms are headquartered in states with high noncompete enforceability (i.e., when TMT members have fewer external opportunities to be promoted to CEO) and weaker when firms have heirs apparent (i.e., TMT members have fewer internal opportunities to being promoted to CEO). Using data from 1,811 US public firms from 1993 to 2012, we find broad support for our hypotheses. Our study advances scholarly understanding of tournament incentives in the form of the CEO–TMT vertical pay gap and provides practical implications on how boards of directors can incorporate tournament incentives into the design of executive compensation.

Keywords: Tournament theory; Vertical pay gap; Top management team; Firm productivity; Chief executive officer (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:197:y:2025:i:c:s0148296325002760

DOI: 10.1016/j.jbusres.2025.115453

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