Gender, top management compensation gap, and company performance: Tournament versus behavioral theory

Summary

The research paper "Gender, top management compensation gap, and company performance: Tournament versus behavioral theory" by J.P.T. Vieito, published in 2012, explores the intricate relationship between the compensation disparity among top executives, the gender of these executives, and its ultimate impact on company performance. The study specifically tests the applicability of tournament theory versus behavioral theory in explaining these dynamics. Tournament theory generally posits that larger pay gaps serve as strong incentives, motivating executives to exert greater effort and thereby enhancing firm performance. Conversely, behavioral theory considers other psychological and social factors that influence executive behavior and firm outcomes, particularly in the context of gender. Vieito's findings suggest that a wider internal compensation gap between the CEO and the top management team (TMT) is positively associated with higher corporate performance. This indicates that, to some extent, the incentive mechanisms proposed by tournament theory hold true. However, the study introduces a critical nuance by examining the moderating effect of gender. It proposes that behavioral theory is more effective in explaining the role of female leaders in this relationship. The presence of female executives, particularly on boards, is linked to beneficial corporate attributes such as a stronger commitment to information disclosure, increased flexibility, enhanced problem-solving capabilities, and improved team-building abilities. These characteristics are vital for companies to thrive, especially in unpredictable market conditions. The research implies that top-level female executives influence company actions and decisions differently than their male counterparts, contributing to an improvement in the company's value. The implications of this paper are significant for corporate governance and compensation design. While traditional tournament theory may suggest simply widening pay gaps for performance, Vieito's research highlights the importance of considering the gender composition of top management. It underscores that the positive influence of female executives on firm performance might not solely stem from competitive incentives but also from their distinctive leadership styles and contributions to corporate mechanisms. Therefore, the study advocates for a more nuanced approach to executive compensation strategies, one that acknowledges the diverse impacts of gender and aligns with the principles of behavioral theory, especially when aiming to leverage the full potential of a diverse leadership team. The paper also notes that the effectiveness of tournament theory can be industry-specific, working well in non-high-tech firms but not necessarily in high-tech firms that require high coordination.