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Executive Compensation and Tournament Theory: Empirical Tests on Danish Data

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  • Eriksson, Tor

Abstract

This article adds to the empirical literature on tournament theory as a theory of executive compensation. The author tests several propositions of tournament models on a rich data set containing information about 2,600 executives in 210 Danish firms during a four-year period. He asks if pay differentials between job levels are consistent with relative compensation; if pay dispersion between levels is higher in noisy environments; if the dispersion is affected by the number of tournament participants; if average pay is lower in firms with more compressed pay structures; and if wider pay dispersion enhances firm performance. Most of the predictions gain support in the data. Copyright 1999 by University of Chicago Press.

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  • Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-280, April.
    • Handle: RePEc:ucp:jlabec:v:17:y:1999:i:2:p:262-80
    DOI: 10.1086/209920
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    References listed on IDEAS

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    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Jonathan S. Leonard, 1990. "Executive Pay and Firm Performance," ILR Review, Cornell University, ILR School, vol. 43(3), pages 13, April.
    3. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
    4. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-179, April.
    5. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-628, October.
    6. Eriksson, Tor & Lausten, Mette, 2000. "Managerial pay and firm performance -- Danish evidence," Scandinavian Journal of Management, Elsevier, vol. 16(3), pages 269-286, September.
    7. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
    8. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    9. Drago, Robert & Garvey, Gerald T, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 1-25, January.
    10. Lazear, Edward P, 1989. "Pay Equality and Industrial Politics," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 561-580, June.
    11. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
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