Outside Employment Opportunities and Tournament Incentives

Abstract We find that firms enlarge the executive pay gap when executive mobility is constrained by more enforceable noncompete agreements. We interpret this finding as evidence that firms increase tournament incentives to keep executives incentivized after the loss of valuable outside employment options. Consistent with this argument, we observe more significant increases in pay gaps for executives with greater ex ante mobility options. However, shocks reducing enforceability have a weaker, less robust impact on pay gaps, contributing to asymmetric effects. Following restrictions to mobility, equity portfolios that long (short) firms that boost (do not boost) executive pay gaps generate positive alphas.