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Contestability and Pay Differential in the Executive Suites

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  • James S. Ang
  • Shmuel Hauser
  • Beni Lauterbach

Abstract

In comparison to the abundant evidence on CEOs' compensations, little is known about the compensation of other senior executives, and on how the pay differential between CEO and other senior executives affects firm performance. We examine several potential explanations of the pay differential in the executive suite, using a sample of 367 Israeli firms listed on the Tel‐Aviv Stock Exchange. The empirical results fail to support the tournament and pay equity models. Instead, our evidence suggests a model where senior executives are encouraged (by the structure implied in their pay contract) to cooperate with each other (the team playing model). In a subset of firms managed by their owners we observe greater pay differentials between the owner‐CEO and other senior executives. Interestingly, only in this subset of owner‐managed firms, higher pay differentials can be associated with better firm performance.

Suggested Citation

  • James S. Ang & Shmuel Hauser & Beni Lauterbach, 1998. "Contestability and Pay Differential in the Executive Suites," European Financial Management, European Financial Management Association, vol. 4(3), pages 335-360, November.
    • Handle: RePEc:bla:eufman:v:4:y:1998:i:3:p:335-360
    DOI: 10.1111/1468-036X.00070
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    Cited by:

    1. Fredrik Heyman, 2005. "Pay inequality and firm performance: evidence from matched employer-employee data," Applied Economics, Taylor & Francis Journals, vol. 37(11), pages 1313-1327.
    2. Jerry Coakley & Stavroula Iliopoulou, 2006. "Bidder CEO and Other Executive Compensation in UK M&As," European Financial Management, European Financial Management Association, vol. 12(4), pages 609-631, September.
    3. Ang, James & Lauterbach, Beni & Schreiber, Ben Z., 2002. "Pay at the executive suite: How do US banks compensate their top management teams?," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1143-1163, June.
    4. Zalewska, Anna, 2014. "Gentlemen do not talk about money: Remuneration dispersion and firm performance relationship on British boards," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 40-57.

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