Winners and losers of corporate tournaments

Abstract

In a corporate tournament, executive directors are motivated by the prospect of promotion to CEO, with winners receiving large increases in remuneration. Tournament losers by contrast face a discrete loss in their valuation of their position, since the prospect of them becoming CEO is substantially reduced. We argue that this offers an opportunity to test the predictions of tournament theory by observing the quit behaviour and the wages of the losing directors. We find a sharp increase in the likelihood that directors leave the firm when the tournament ends. The directors who remain receive an increase in their remuneration following a rival's promotion.