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Compensation Policy in Banking: The Case of Tournament Incentives

In: New Challenges for the Banking Industry

Author

Listed:
  • Fatima Cardias Williams

    (University of Surrey)

  • Jonathan Williams

    (University of Surrey)

Abstract

We consider the impact of tournament incentives on firm performance. To proxy high-powered tournament incentives, we construct a CEO pay gap as the difference in pay between the highest-earning executive and other officers. Our robust empirical evidence unambiguously demonstrates that high-powered tournament incentives lead to higher levels of firm profitability after controlling for the level of pay and other executive and firm-level characteristics. This result can inform the design of firms’ compensation policy and we recommend firms use vertical pay practices to motivate effort and realise firms’ organisational goals. We fail to support the opposing conjecture that large pay gaps could fuel tensions among executives that could retard firm performance.

Suggested Citation

  • Fatima Cardias Williams & Jonathan Williams, 2023. "Compensation Policy in Banking: The Case of Tournament Incentives," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Santiago Carbó-Valverde & Pedro J. Cuadros-Solas (ed.), New Challenges for the Banking Industry, chapter 0, pages 9-46, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-031-32931-9_2
    DOI: 10.1007/978-3-031-32931-9_2
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