Tournament incentives, corporate strategy and growth and efficiency

Purpose The study investigates how tournament incentives within the top management team influence firms' strategic choices, specifically the adoption of turnaround, harvest and aggressive growth strategies. The study further examines whether CEO power moderates the relationship between tournament incentives and strategic choice. Design/methodology/approach We estimate multinomial logit models to examine the association between tournament incentives and strategic choice. To address potential endogeneity, we employ a control-function approach, using industry-level pay dispersion as an instrument. Additional analyses examine the moderating role of CEO power and the robustness of the findings to alternative strategy classifications. Findings Tournament incentives are positively associated with the likelihood of adopting aggressive growth strategies and negatively associated with the likelihood of adopting Harvest and Turnaround strategies. The results remain robust after addressing endogeneity and using alternative strategy classifications based on absolute performance thresholds. We further find that CEO power weakens the influence of tournament incentives on strategic choice. The positive association between tournament incentives and aggressive growth strategies is substantially stronger when CEO power is low than when CEO power is high. Research limitations/implications The study extends tournament theory by demonstrating that tournament incentives influence not only managerial risk-taking but also firms' strategic orientations. The findings contribute to research on executive compensation and corporate governance by showing that the strategic implications of tournament incentives depend on organizational power structures. By identifying CEO power as an important boundary condition, the study advances understanding of how incentives and governance jointly shape strategic outcomes. Practical implications The findings suggest that compensation systems can influence the firm's strategic direction in addition to motivating managerial effort. Boards and compensation committees seeking growth-oriented strategies may benefit from stronger tournament incentives, whereas firms emphasizing efficiency and value extraction may benefit from less competitive pay structures. The results further highlight the importance of governance design, as concentrated CEO power can reduce the effectiveness of tournament-based incentives. Originality/value The study contributes to the literature by examining how tournament incentives influence the selection of distinct strategic postures rather than broad measures of managerial risk-taking. It further demonstrates that CEO power conditions the effectiveness of tournament incentives, providing a more nuanced understanding of how executive compensation and governance structures jointly shape corporate strategy.