Executive Overconfidence and Compensation Structure
61 Pages Posted: 28 Mar 2014 Last revised: 20 Mar 2016
Date Written: July 1, 2015
We examine the impact of overconfidence on compensation structure. We test alternative hypotheses, drawing upon and extending existing theories. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident CEOs to exploit their positively-biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (SOX and FAS 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.
Keywords: Overconfidence, Compensation Structure, Incentive Compensation
JEL Classification: J33, M52
Suggested Citation: Suggested Citation