Gender, Top Management Compensation Gap, and Company Performance: Tournament Versus Behavioral Theory

Abstract

Manuscript Type: Empirical. Research Question/Issue: This study is among the first to investigate the impact of gender on the relationship between the compensation gap of the CEO and Vice‐Presidents on company performance, testing if companies managed by a female CEO or a male CEO follow tournament or behavioral theory. Tournament theory suggests that a large compensation gap between CEO and company Vice‐Presidents (VPs) leads to higher company performance; behavioral theory states that higher performance may be achieved with a small compensation gap between CEO and VPs. Additionally the study also investigates if companies managed by a female CEO perform better, or not, than those managed by a male CEO, and if the factors that explain the compensation gap between CEO and VPs in these two groups of companies are the same, or not. Data for the investigation emanated from the USA during the period 1992 to 2004. Research Findings/Insights: The results reflect something quite new in the area – on average, companies managed by a female CEO perform better, and have a smaller compensation gap between the CEO and VPs than companies managed by a male CEO. In companies managed by a female CEO, a smaller difference in the total compensation gap between CEO and Vice‐Presidents leads, on average, to higher company performance, however, when the CEO is a male, a higher compensation gap is required to obtain higher company performance. The results provide empirical support that the behavioral theory is predominant in companies managed by a female whereas tournament theory is predominant in companies managed by a male. Theoretical/Academic Implications: The paper fills an important gap in the existing literature by providing econometric evidence that males and females CEOs have a different impact on the relationship between CEO and VPs compensation gap and company performance, and that it is not indifferent to choosing a male or a female CEO in terms of company performance. Practitioner/Policy Implications: This study offers an insight to practitioners and policy makers suggesting that gender influences the relationship between the CEO and Vice‐Presidents compensation gap and company performance. Boards may be able to improve company performance if they limit the compensation gap between CEO and VPs when the CEO is a female and extend it, when it is a male.