CEO optimism and incentive compensation

• Main Author: OTTO, Clemens A.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: CEO optimism; incentive compensation; compensation contract; Corporate Finance; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5375; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6374/viewcontent/1_s2.0_S0304405X14001330_main.pdf
• Institution: Singapore Management University

I study the effect of chief executive officer (CEO) optimism on CEO compensation. Usingdata on compensation in US firms, I provide evidence that CEOs whose option exercisebehavior and earnings forecasts are indicative of optimistic beliefs receive smaller stockoption grants, fewer bonus payments, and less total compensation than their peers. Thesefindings add to our understanding of the interplay between managerial biases andremuneration and show how sophisticated principals can take advantage of optimisticagents by appropriately adjusting their compensation contracts.