Internal managerial promotions: Insider incentives and CEO succession

We identify and compare firms that promote a single executive (successor-incentive) and companies that conduct tournaments (tournament-incentive) among inside managers to succeed the CEO. Successor-incentive firms give more pay-for-performance compensation to the designated successor, are more likely in firms or industries where firm-specific human capital is more important to the CEO position and where the supply of potential outside CEO replacements is limited. In addition, these firms are associated with lower CEO turnover sensitivity to firm performance. Restricting firms that are suited for a successor-incentive promotion to a tournament-incentive promotion is associated with lower firm valuation.

► We use internal rankings to determine the executive(s) likelihood to be the next CEO. ► Firms use compensation incentives to offset internal competition incentives. ► Firm-specific human capital and CEO supply are key determinants of promotion type. ► CEO pay is higher and turnover is less sensitive to ROA in single successor firms. ► Tournament promotions may not be beneficial for all firms.