Independent Directors’ Reputation Incentives and Executive Pay Tournaments

We provide evidence of a positive association between independent directors’ reputation incentives and the magnitude of the CEO pay gap, defined as the difference in compensation between the CEO and lower-ranked executives. The CEO pay gap serves as a proxy for the strength of executive pay tournaments within the firm. Using a sample of S&P 1500 firms, we show that independent directors with stronger reputation incentives employ larger pay gaps to encourage executive risk-taking, thereby enhancing firm performance and protecting their own reputation in the labor market.