This article analyzes the efficiency of the rank‐order contract for a finite number of risk‐neutral agents under both moral hazard and adverse selection. The first‐best outcome is shown to be supported by a set of rank‐order contracts which penalize a small fraction of agents but do so heavily. The article also shows how these rank‐order contracts compare with those giving a large prize to few agents. Finally, the article provides an informal argument for why firms do not follow a penalty‐giving rank‐order contract in their promotion policies as often as the theory predicts.