Contestability and Pay Differential in the Executive Suites

In comparison to the abundant evidence on CEOs' compensations, little is known about the compensation of other senior executives and on how the pay differential between CEO and other senior executives affects firm performance. We examine several potential explanations of the pay differential in the executive suite, using a sample of 367 Israeli firms listed on the Tel-Aviv Stock Exchange. The empirical results fail to support the tournament and pay equity models. Instead, our evidence suggests a model where senior executives are encouraged (by the structure implied in their pay contract) to cooperate with each other (the team playing model). In a subset of firms managed by their owners we observe greater pay differentials between the owner-CEO and other senior executives. Interestingly, only in this subset of owner-managed firms, higher pay differentials can be associated with better firm performance