We investigate how industry tournament incentives, defined as the CEO pay gap between a firm and its industry peers, influence regulatory non-compliance, corporate misconduct, and penalty severity. We find that stronger industry tournament incentives significantly increase firms' risk of misconduct. Our results suggest that heightened external competition pressures executives to cut discretionary spending, intensify workloads, and prioritize short-term gains over ethical standards. These adverse effects are most pronounced in firms with weaker ethical cultures, higher CEO mobility, lower industry competition, and weaker corporate governance.