Abstract
Building on the notion of tournament theory, the current study shows that the pay gap between the CEO and the top management team (TMT) offers a motivation for executives to engage in aggressive competitive actions. We particularly highlight the boundary conditions of tournament theory, arguing that a firm’s competitive action is a function both the CEO-TMT pay gap and TMT members’ probability of winning the promotion, such that the greater the winning probability, the stronger the tournament effect of the CEO-TMT pay gap. We found that CEO-TMT pay gap influences the focal firm’s speed of response when it is attacked by a rival. However, this influence is conditioned by factors influencing the winning probability, such as the characteristics of the TMT (TMT size, CEO duality, and CEO age) and the characteristics of the competitive situation (the rival’s type of action, the relative market share and performance of the rival versus the focal firm). By using action-level analysis, our research offers a fine-grained approach to investigate how executives’ personal goals may influence their firms’ behavior under specific competitive attacks.
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