Executive Equity‐Based Compensation and Tournament Incentives

ABSTRACT We find that the losers in CEO promotion tournaments sell their equity holdings profitably to mitigate the reductions in the promotion‐based component of their contracts. They avoid selling before losing the contest to maximize their promotion probabilities. Those who are more likely to compete in the tournament and to face a greater forgone tournament prize trade more aggressively. Our results suggest that tournament losers consider their trading opportunities as outside options to compensate themselves ex‐post. This strategy weakens the relationship between tournament incentives and firm performance and highlights new implications for tournament incentives models, compensation committees, and insider trading regulations.