Promotion Incentives and Corporate Performance: Is There a Bright Side to 'Overpaying' the CEO?

12 Pages Posted: 31 Mar 2010

See all articles by Jayant R. Kale

Jayant R. Kale

Northeastern University

Ebru Reis

Istanbul Bilgi University

Anand Venkateswaran

Northeastern University - Finance and Insurance Area

Abstract

Earlier studies have shown that stronger equity-based incentives for CEOs are generally associated with better corporate performance and higher values. In this article, the authors report the findings of their recent study of the effects of promotion-based “tournament” incentives for non-CEO executives (or “VPs”) on corporate performance for a large sample of companies during the 12-year period from 1993–2004.

The study’s main finding is that such tournament incentives, as measured by the pay differential between the CEO and VPs, were associated with better corporate operating performance and higher corporate stock returns. Moreover, tournament incentives, as one would expect, appeared to be more effective when CEOs were nearing retirement - but less effective when the firm had a new CEO (and even weaker when the new CEO was an outsider).

Suggested Citation

Kale, Jayant Raghunath and Reis, Ebru and Venkateswaran, Anand, Promotion Incentives and Corporate Performance: Is There a Bright Side to 'Overpaying' the CEO?. Journal of Applied Corporate Finance, Vol. 22, Issue 1, pp. 119-128, Winter 2010, Available at SSRN: https://ssrn.com/abstract=1581821 or http://dx.doi.org/10.1111/j.1745-6622.2010.00267.x

Jayant Raghunath Kale (Contact Author)

Northeastern University ( email )

Boston, MA 02115
United States

Ebru Reis

Istanbul Bilgi University ( email )

Eski Silahtarağa Elektrik Santralı
Silahtarağa Mah. Kazım Karabekir Cad. No: 1 Eyüp
Istanbul, 34060
Turkey

Anand Venkateswaran

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States

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