The tournament theory is the explanation of wage differences in terms of relative performance. This is an alternative explanation to the one that suggests that the very large differences in Income are the result of equally large differences in performance. In my opinion it seems that my bosses at work are overpaid. They make obscene sums of money for the very little work they seem to do while cubicle slaves work extremely hard almost without reward. Economist actually say this Is economic logic.
In Corporations the primary reason for the high pay given to the CEO may be to give those lower in the hierarchy an Incentive to work hard, not to give the CEO himself the Incentive to perform well. The fact that my bosses are overpaid, according to the article, Is for my benefit, not for theirs. Our bosses are not being paid for the work they do but rather to Inspire the other workers. The tournament theory Is basically saying that we all work our butts off In underpaying Jobs In the pop that one day we’ll win the race to become one of those overpaid bosses.
The tournament theory is basically logic. Good workers are promoted, less capable workers are not. Tournament theory is designed to keep your workers motivated. Tournaments demand increasingly absurd pay packages as workers get higher up the hierarchy. At the lowest level, a promotion my not need to carry much of a pay increase, because it opens up the possibility of a future to more promotions. But near the end of your career a bigger check will most likely come your way.