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Executive overconfidence and compensation structure

Author

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  • Humphery-Jenner, Mark
  • Lisic, Ling Lei
  • Nanda, Vikram
  • Silveri, Sabatino Dino

Abstract

We examine the impact of overconfidence on compensation structure. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident Chief Executive Officers (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 (Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standard (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.

Suggested Citation

  • Humphery-Jenner, Mark & Lisic, Ling Lei & Nanda, Vikram & Silveri, Sabatino Dino, 2016. "Executive overconfidence and compensation structure," Journal of Financial Economics, Elsevier, vol. 119(3), pages 533-558.
    • Handle: RePEc:eee:jfinec:v:119:y:2016:i:3:p:533-558
    DOI: 10.1016/j.jfineco.2016.01.022
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    More about this item

    Keywords

    Overconfidence; Compensation structure; Incentive compensation;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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