To analyze how two incentive schemes, promotion and pay for performance, interact as determinants of CEO compensation and within-firm wage inequality, I embed a pay-for-performance framework into a tournament structure. The model shows that when CEO and managers contribute to a firm’s output independently, it is optimal for the firm to provide the CEO with compensation beyond her reservation value if many managers compete for the CEO position. In particular, promotion incentives for managers generate high CEO pay and a wage gap between CEO and managers. However, I find that the promotion incentive motive can disappear if there is complementarity between CEO’s and managers’ outputs. In this case, the purpose of high CEO compensation is to induce the CEO to put more effort, not to provide promotion incentives for managers. The tension between incentives for CEO and managers makes it difficult to interpret the meaning of high CEO compensation and a within-firm wage gap. As a possible solution, I suggest the use of CEO’s base salary to identify which incentive factor is driving the pay gap.