Tournament incentives, age diversity and firm performance

Abstract

This study introduces a new dimension, age diversity of non-CEO executives, which moderates the relationship between promotion-based tournament incentives, measured as the pay gap between the CEO and non-CEO executives, and firm performance. For a sample of Chinese listed firms from 2005 to 2015, we find that the tournament incentives for non-CEO executives relate positively to firm performance. This relationship is weaker when non-CEO executives are from different age cohorts, whereas the tournament effect is enhanced when non-CEO executives are from the same age cohort. The negative moderation effect of age diversity is more pronounced in state firms and in the Northern China Plain cultural region. The negative moderation effect disappears in firms with CEOs who have overseas experience. We reason that the peer pressure among the similar-aged non-CEO executives enhances the tournament competition and that age hierarchy reduces incentives for younger executives to compete. Our findings have important implications for firms not only in China, but also in countries and regions where seniority is highly valued when setting executive compensation and optimizing organizational structure.