EXPRESS: Different Strokes for Different Folks: The Moderating Effect of Top Managers’ Political Ideologies on the Efficacy of TMT Vertical Pay Disparities

A debate surrounds the utility of tournament theory prescription for the pay arrangements of top executives, based on competing perspectives on the relationship between vertical pay disparities and important firm outcomes. In this study, we attempt to reconcile the competing perspectives by offering a contingency view of the utility of tournament theory prescriptions. We integrate insights from the person pay interaction theory with research on political ideology to show how top executive's individual and TMT’s team-level political ideology shapes the relationship between vertical pay disparities and top executive departure and firm performance. Using data on U.S. public firms, we find that liberal-leaning top executives are more likely to exit the firm at the higher levels than at lower levels of vertical pay disparity, whereas conservative-leaning top executives are more likely to exit the firm at the lower levels than at higher levels of vertical pay disparity. Furthermore, liberal-leaning TMTs perform better at the lower levels than at higher levels of vertical pay disparity, whereas conservative-leaning TMTs perform better at the higher levels than at lower levels of vertical pay disparity. We discuss the implications of these findings for the literature on executive compensation, corporate governance, and executive values.