Eyes on the Prize: Do Industry Tournament Incentives Shape the Structure of Executive Compensation?

Forthcoming, Journal of Financial and Quantitative Analysis

68 Pages Posted: 19 Aug 2020 Last revised: 13 Dec 2020

See all articles by Emdad Islam

Emdad Islam

Monash University

Lubna Rahman

Monash University

Rik Sen

University of New South Wales (UNSW)

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Date Written: July 16, 2020

Abstract

We investigate whether external industry tournament incentives influence the design of executive compensation contracts. Using staggered negative mobility shocks as exogenous disruptions to tournament incentives, we show that firms treated by these shocks act to restore their executives’ diminished implicit risk-taking incentives by increasing compensation vega. On average, post-shock compensation vegas increase by about 10%. These effects are considerably larger for treated executives with strong tournament incentives and high ex-ante mobility. Mobility shocks have no impact on compensation delta or total pay. Our results shed light on how explicit risk-taking incentives are optimized with respect to executive career concerns.

Keywords: Tournament Incentives, Executive Compensation Design, Risk-Taking Incentives, Executive Mobility

JEL Classification: G30, M12

Suggested Citation

Islam, Emdad and Rahman, Lubna and Sen, Rik and Zein, Jason, Eyes on the Prize: Do Industry Tournament Incentives Shape the Structure of Executive Compensation? (July 16, 2020). Forthcoming, Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3653980 or http://dx.doi.org/10.2139/ssrn.3653980

Emdad Islam

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Lubna Rahman

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Rik Sen

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Jason Zein (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

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