Industry Tournament Incentives

We model and empirically assess industry tournament incentives for CEOs. The measures we develop for the tournament prize derive from the compensation gap between the CEO at her firm and the highest-paid CEO among similar competing firms. The model predicts that firm performance and risk increase in the external pay gap, with these incentive effects increasing in the probability of the executive winning the tournament. GMM-IV estimates indicate that the external, industry pay gap is reliably and positively associated with firm performance and risk and with the riskiness of investment and financial policy. The effect of the industry tournament incentive is stronger when empirical proxies indicate the probability of the executive winning is higher