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

Published online by Cambridge University Press:  26 August 2021

Emdad Islam ,
Lubna Rahman ,
Rik Sen  and
Jason Zein Open the ORCID record for Jason Zein [Opens in a new window]
Emdad Islam
Affiliation:
Monash University Monash Business [email protected]
Lubna Rahman
Affiliation:
Monash University Monash Business [email protected]
Rik Sen
Affiliation:
University of New South Wales (UNSW) Australia UNSW Business [email protected]
Jason Zein*
Affiliation:
University of New South Wales (UNSW) Australia UNSW Business School
*
[email protected] (corresponding author)
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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 approximately 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1929 - 1959
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, John Bizjack, Sudipto Dasgupta, Raymond Da Silva Rosa, Russell Jame, Swaminathan Kalpathy (discussant), Sandy Klasa, Gustavo Manso, Ron Masulis, Ernst Maug, Peter Pham, and Merih Sevilir for helpful comments. We also thank conference participants at the 2019 Financial Management Association Asia-Pacific Meeting and seminar participants at La Trobe University and UNSW. The first version of this article was circulated under the title “Mobility Restrictions, Career Concerns, and the Structure of Executive Compensation Contracts.” Islam expresses special thanks to his PhD co-supervisor Ron Masulis for extensive comments. All errors are our own.

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