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Firms commonly use promotion tournaments to motivate employee performance. While prior research has examined the incentive effects of such tournaments, we focus on certain additional consequences that arise following the end of such tournaments. More specifically, we investigate chief operating officer (COO) promotion tournaments to examine whether and how the subsequent actions of non-promoted COOs, whom we refer to as non-promoted executives (NPEs), affect firm performance. When NPEs are passed over for promotion, their implicit, promotion-based incentives decline because there is increased uncertainty regarding their future advancement within the firm. In turn, we predict and find that firms are unable to fully adjust the NPEs’ explicit compensation to replace the diminished promotion incentives, which we attribute to associated adjustment costs. As a result, NPEs face lower incentives after the COO tournament ends, and thus we predict and find an increase in turnover among NPEs. Further, we document a decline in firm performance following the end of the COO tournament, which we attribute to the decrease in incentives for NPEs who choose to stay and the loss in human capital when NPEs choose to leave the firm. Overall, our results show that there are potentially negative consequences for the firm when a promotion tournament ends resulting from the actions of the non-promoted employees.
Eric W Chan, University of Texas at Austin
John H Evans III, University of Pittsburgh
Duanping Hong, University of Pittsburgh