Giving executives massive raises for getting promoted actually backfires because it just encourages them to cheat with insider trading.
SSRN · March 13, 2026 · 6411291
Why it matters
While companies use huge salary gaps between ranks to motivate hard work, this study found that these gaps actually drive managers to treat insider trading as 'implicit compensation.' Instead of focusing on earning the promotion, executives become more likely to dump their shares right before bad news hits to offset the pay disparity.
From the abstract
This paper investigates whether and how industry tournament incentives affect insider trading profitability in China. By using a large sample of Chinese listed firms, we find that external pay gap is positively associated with insider trading profitability, primarily reflected in insider sales. This effect is more pronounced in firms with lower executive compensation and higher managerial shareholdings. Our findings are robust to the consideration of alternative proxies, sample bias, and endogen