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

• Author: Joao Paulo Torre Vieito
• Date: 01 January 2012
• Published date: 01 January 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00878.x

Gender, Top Management Compensation Gap,

and Company Performance: Tournament versus

Behavioral Theory

Joao Paulo Torre Vieito*

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 thatexplain 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 managedby 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 compen-

sation 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 havea 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.

Keywords: Corporate Governance, Executive Compensation Gap, Company Performance, Tournament Theory, Beha-

vioral Theory

INTRODUCTION

Until now,only a small number of studies, most of which

are in the area of labor economics, have analyzed the

impact of the compensation differential between CEO and

Vice-Presidents (VPs) on company performance (Main,

O’Reilly, & Wade, 1993; Henderson & Fredrickson, 2001; and

Kale, Reis, & Venkateswaran,2009, among others). Nonethe-

less none of these have used gender as a control variable.

Tournament theory suggests that a big compensation gap

between CEOs and Vice-Presidents will increase the com-

petitiveness among these Vice-Presidents to obtain the

CEO’s position in the future, and that this competition will

lead to an improvement in companyperformance. An oppo-

site theory – the behavioral theory – suggests thatonly small

differences in terms of compensation between CEO and

*Address for correspondence: Joao Paulo Torre Vieito, Department of Finance and

Accounting, Polythecnic Institute of Viana do Castelo, Valença, 4930, Portugal. Tel:

351-251-800840; Fax: 351-251-800841; E-mail: joaovieito@esce.ipvc.pt

46

Corporate Governance: An International Review, 2012, 20(1): 46–63

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00878.x

Vice-Presidents promotes collaboration and coordination

between them and performance will be greater when this

gap is reduced.

Literature would suggest that this study is the f‌irst to

analyze if the size of the differential between what is paid to

the CEO and to Vice-Presidents (VPs) has the same impact,

or not, on company performance, when the company is

managed by a female or a male CEO. I also investigate if

companies managed by a female CEO perform better than

companies managed by a male CEO and if the factors that

explain CEO and VPs compensation gap in companies

managed by a female or male CEO are identical.

This result describes something quite new in the area. On

average, companies with a female CEO have higher perfor-

mance than companies managedby a male CEO. Companies

with a female CEO and a small compensation gap between

the CEO and Vice-Presidents show, on average, higher per-

formance, however when the CEO is a male, it is a high, and

not a small, compensation gap that leads to high company

performance. The f‌indings provide empirical evidence that

behavioral theory is predominant in companies managed by

a female, whereas tournament theory is predominant in

companies managed by a male.

Companies managed by a female CEO on average appear

to have a smaller total compensation gap between the CEO

and Vice-Presidents than companies managed by a male

CEO. The Chow test also provide empirical evidence that

factors which explain the compensation gap between the

CEO and company VPs are not identical in companies

managed by a female CEO and those managed by a male

CEO.

The f‌indings are extraordinarily important to Boards, as

they provide empirical evidence that the question of gender

is not indifferent in terms of the impact of compensation gap

on company performance.

The study begins with a literature review and specif‌ic

research hypotheses in Section 2. Section 3 presents the

methodology used in the research. Section 4 describes the

analysis and discusses the results. Section 5 draws a

summary and the conclusion, and Section 6 provides biblio-

graphic references.

LITERATURE REVIEW AND

HYPOTHESES DEVELOPMENT

During the last few years, a signif‌icant number of models

(tournament theory, managerial theory, behavioral theory,

and social theory) have tried to explain internal company

compensation schemes. This investigation focuses on the

two most predominant theories: tournament theory and

behavioral theory, in an attempt to investigate if high or low

compensation gaps between CEO and Vice-Presidents have

different impacts in terms of company performance. Addi-

tionally, the major differences between genders are also

described.

In the past,companies have been organized on the basis of

a signif‌icant number of hierarchical levels. The number of

hierarchical levels was greater in larger companies than in

small companies (e.g., Simon, 1957). It was assumed that

each hierarchical level had different responsibilities and that

greater responsibility should be remunerated with higher

compensation. Currently, due to recent economic develop-

ment and organizational restructuring, companies have

made the management level leaner to respond quickly to

environmental uncertainties and changes. Accordingly

when analyzing the CEO’s responsibilities, it is the number

of employees and not the number of organizational levels

that must be taken into account. According to this model of

company organization,the number of employees competing

for the position of CEO is greater, and normally the prize for

the winner increases when the number of competitors also

increases (Bognanno, 2001).

Shrader, Blackburn, and Iles (1997) report that companies

are currently facing increasing international competitive

pressures, unstable markets and new and complex technolo-

gies, and that societies are also changing substantially.

According to Carpenter and Sanders (2002) top teams are

more effective in dealing with such competitive circum-

stances when they work as a group with common interests,

as they unite individual efforts, exchange information, take

on a cooperative behavior, and also make joint decisions

(Hambrick, 1995). Working as a team and cooperating may

be a better option to manage the inherent diff‌iculties of a

large organization than a CEO working alone.

Having collected information on communication between

American and Japanese executives, employees and custom-

ers, Tannen (1990) reports that “in America, men’s talk, or

“report talk” is distinguished from women’s talk, or

“rapport talk” (Tannen, 1990:50). Men use a direct, confron-

tational style while women resort to a more indirect, coop-

erative style (Howden, 1994). According to these authors,

women suggest and men demand. Havingalso analyzed the

competitive and cooperative communication style ofAmeri-

can and Japanese men and women, Howden states that

“individualists believe that they can survive on their own;

collectivists know they cannot survive without group mem-

bership, whether in the workplace, family, or community”

(Howden, 1994:55). Females have also been taught that they

are dependent on others, and that others depend on them,

while “responsibility for a man is taking the blame, or the

glory, as an individual; for a female, it is caring and provid-

ing for others” (Howden, 1994:55). Rosener (1995) states that

females in top management are more f‌lexible and better able

to deal with ambiguity than males and these abilities to

motivate team building and be f‌lexible are essential factors

for the success of any modern business that is conducted in

an uncertain context. Based on this information the f‌irst

hypothesis is proposed:

Hypothesis 1. On average, when a company is managed by a

female CEO, the company performance is higher than when the

CEO is a male.

The expectation is that, due to the aforementioned personal

characteristics, females are better able to deal with modern

businesses that are conducted in uncertain contexts and con-

sequently f‌irms with females CEOs will on average perform

better than f‌irms with males CEOs.

Tournament theory, also known as the economic theory,

was developed by Lazear and Rosen (1981) and O’Reilly,

Main, and Crystal (1988), and explains remuneration differ-

ences in terms of marginal productivity. It suggests that

GENDER AND TOP MANAGEMENT COMPENSATION GAP 47

Volume 20 Number 1 January 2012© 2011 Blackwell Publishing Ltd