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Younger CEO and older managers: focusing on tournament incentives

Author

Listed:
  • Jun Yeung Hong

    (Hanbat National University)

  • Sung Min Jeon

    (Korea University)

  • Gun Lee

    (Changwon National University)

Abstract

We investigate the effectiveness of tournament theory based on the age gap between the CEO and the top management team (TMT) in Korean firms. While tournament incentives encourage managers to work harder to improve their performance, their effects may differ on executives’ sociological and psychological characteristics. Under Confucian culture, where seniority is highly valued and there is great respect for a senior person, we expect that the effectiveness of tournament theory would differ based on the age gap between the CEO and TMT. Using firms listed on the Korean stock market from 2013 to 2020, we document a significant and positive relationship between the CEO and TMT pay gap and firm performance only when the CEO is older than the average executive in the TMT. Furthermore, we find a significant positive relationship between the pay gap and firm performance only when the CEOs is older than the oldest executives. In addition, we find that the incentive effect of the pay gap between the CEO and TMT exists in horizontal culture firms, even when the CEO is younger than the average age of executives in the TMT. Our findings suggest that, in the presence of an age hierarchy, older executives who feel uncomfortable inhibit collaboration among the TMT, thereby impacting the tournament incentive effect. These observations underscore the importance of social factors in designing executive compensation.

Suggested Citation

  • Jun Yeung Hong & Sung Min Jeon & Gun Lee, 2023. "Younger CEO and older managers: focusing on tournament incentives," Economics of Governance, Springer, vol. 24(4), pages 549-573, December.
    • Handle: RePEc:spr:ecogov:v:24:y:2023:i:4:d:10.1007_s10101-023-00303-7
    DOI: 10.1007/s10101-023-00303-7
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    More about this item

    Keywords

    Pay gap; Tournament theory; Age gap; Executive compensation;
    All these keywords.

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • J19 - Labor and Demographic Economics - - Demographic Economics - - - Other

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