Executive Equity-Based Compensation and Tournament Incentives

Abstract

We find that the losers in CEO promotion tournaments sell their equity holdings profitably to mitigate the reductions in the promotion-based component of their contracts. They avoid selling before losing the contest to maximize their promotion probabilities. Those who are more likely to compete in the tournament and to face a greater forgone tournament prize trade more aggressively. Our results suggest that tournament losers consider their trading opportunities as outside options to compensate themselves ex-post. This strategy weakens the relationship between tournament incentives and firm performance and highlights new implications for tournament incentives models, compensation committees, and insider trading regulations.