CEO Power and Labor Productivity: An Experimental Test of Tournament Theory

Abstract

Objective: With the advent of the knowledge economy, physical assets have given way to human capital as an important strategic resource for companies. The company's workforce is considered to be one of the most important intangible resources and assets of the company that have a direct impact on the process of value creation for the company. On the other hand, managers, especially CEOs, play an important role in running a company. Therefore, the present study investigates the relationship between CEO power and firm labor productivity.Method: A sample of 104firms listed in Tehran Stock Exchange during 2011-2018 was selected and the research hypotheses were tested using multivariate regression models based on panel data technique.Results: The results of this study showed a positive relationship between CEO power and labor productivity. In other words, according to tournament theory, firms with stronger CEOs are associated with increased labor productivity. The results also showed that CEO power is positively correlated with labor efficiency and negatively related to labor cost, meaning that more powerful CEOs increase labor efficiency and reduce labor costs. In addition, the results of supplementary analysis showed that the research results are not sensitive to changes in estimation methods and are robust.Conclusion: According to tournament theory, strong CEOs are recognized as the best workforce and receive more rewards for their performance than other employees. Therefore, a significant difference in the amount of payment can motivate the lower-level workforce and help them in their efforts and better performance to obtain career advancement, and this will increase the productivity of the company's workforce. Based on the research findings, the effect of leadership power on company labor productivity should not be ignored and it is suggested that investors and stock exchange activists pay special attention to the CEO's power and consider it as an important and influential factor on company labor productivity in their decisions. Also, considering the position of labor productivity in the better performance of the company, it is suggested to the board of companies to become more familiar with the models and how to calculate the productivity of the company's labor force and its components, including the effectiveness and cost of the company's labor force and consider it when making decisions to replace the CEO. In addition, the Tehran Stock Exchange is recommended to submit a separate annual report to disclose information related to the CEO's power for easy access to corporate information, or by requiring companies to report this information in the board of directors' activity report in Make a separate section.