Abstract
We investigate the effectiveness of tournament theory based on the age gap between the CEO and the top management team (TMT) in Korean firms. While tournament incentives encourage managers to work harder to improve their performance, their effects may differ on executives’ sociological and psychological characteristics. Under Confucian culture, where seniority is highly valued and there is great respect for a senior person, we expect that the effectiveness of tournament theory would differ based on the age gap between the CEO and TMT. Using firms listed on the Korean stock market from 2013 to 2020, we document a significant and positive relationship between the CEO and TMT pay gap and firm performance only when the CEO is older than the average executive in the TMT. Furthermore, we find a significant positive relationship between the pay gap and firm performance only when the CEOs is older than the oldest executives. In addition, we find that the incentive effect of the pay gap between the CEO and TMT exists in horizontal culture firms, even when the CEO is younger than the average age of executives in the TMT. Our findings suggest that, in the presence of an age hierarchy, older executives who feel uncomfortable inhibit collaboration among the TMT, thereby impacting the tournament incentive effect. These observations underscore the importance of social factors in designing executive compensation.
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PERSOLKELLY Consulting, a global HR consulting firm, reported the results of the Asia Pacific Labor Market Survey conducted in 14 countries across the Asia Pacific region (APAC). The survey was based on responses from a total of 140,000 workers in 14 countries in the Asia–Pacific region, including Korea in 2019. The survey is categorized into five sections: working status, organizational culture and job satisfaction, work ethic, self-development and personal growth, and overseas work. Among East Asian countries like Japan, Korea, and China, there was a notable tendency for lower acceptance of diversity. These countries showed relatively high reluctance to work with female bosses, bosses younger than themselves, and foreigners. In contrast, Vietnam, the Philippines, Australia, and New Zealand demonstrated a higher level of openness and acceptance regarding these aspects.
In the case of Korean securities-listed firms, internal promotions are more likely than external recruitment. According to Choi et al. (2014), during the period 2001–2010, 73.5% of CEO turnover are combined with an internal succession. Thus, we do not consider the type of promotion; internal versus external.
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Hong, J.Y., Jeon, S.M. & Lee, G. Younger CEO and older managers: focusing on tournament incentives. Econ Gov 24, 549–573 (2023). https://doi.org/10.1007/s10101-023-00303-7
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DOI: https://doi.org/10.1007/s10101-023-00303-7