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Journal of Financial Economics Vol. 119 No. 3 2016

Executive overconfidence and compensation structure

Mark Humphery-Jenner; Ling Lei Lisic1; Vikram K. Nanda2,3; Sabatino Silveri4

1 George Mason University · 2 The University of Texas at Dallas · 3 Rutgers, The State University of New Jersey · 4 University of Memphis

open access

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.

DOI
10.1016/j.jfineco.2016.01.022
Volume
119
Issue
3
Pages
533-558
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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