Top Management Team Compensation, Strategic Positioning, and Firms’ Competitive Effectiveness

In this study, we investigate how the compensation structure of the top management team (TMT) affects the firm’s competitive effectiveness under different strategies. We delineate the TMT compensation structure along two dimensions - (1) the size of the CEO pay slice as a tournament incentive that motivates individual effort from each of the CEO's direct reports and (2) the degree of pay dispersion among the CEO's top team that affects inclination of the team to collaborate and coordinate. We adopt an innovative measure of firm competitive effectiveness that uses Data Envelopment Analysis (DEA) to determine a firm's relative efficiency in converting resources into revenues compared to the industry leader (Demerjian, Lev and McVay 2012). Using Miles and Snow's (1978, 2003) strategic typology to classify firms into Prospectors, Defenders and Analyzers, we find that the association between CEO pay slice and competitive effectiveness is more positive for firms following the Prospector strategy than for Analyzers. We also find that higher pay dispersion among the CEO's top team appears to be more harmful for both Prospectors and Defenders than for Analyzers.