Does the Overconfidence of the CEO Affect His Pay Structure?

Patty Bick^1,

¹University of Tulsa, United States

Cite this paper:
Patty Bick. Does the Overconfidence of the CEO Affect His Pay Structure?. Journal of Finance and Economics. 2015; 3(5):86-96. doi: 10.12691/jfe-3-5-2

Abstract

If board of directors know the overconfidence level of their Chief Executive Officers, the CEOs' compensation should reflect the optimal structure which aligns the CEOs' incentives with shareholders' interests. Previous literature has documented the existence of overconfident CEOs and the effect of the overconfidence on the decisions of the firm. Since overconfidence can be misconstrued as talent, however, boards may not easily recognize CEO overconfidence. Even if overconfidence is recognized, boards may not give optimal contract due to CEO entrenchment. Consistent with the theory, I find that boards do optimally set CEO compensation structure consisting of low equity to cash mix for slightly overconfident CEOs.

Keywords:
CEO Overconfidence compensation boards

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