Nav: Home

Study: CEO personality traits play role in incentive pay, compensation

March 28, 2016

Companies appear to structure compensation contracts and incentive pay based on a manager's personality traits, and not just firm characteristics, according to a new study from The University of Texas at Dallas.

Dr. Vikram Nanda, O.P. Jindal Distinguished Chair of finance and managerial economics in the Naveen Jindal School of Management, said there are divergent views on the use of options and stock in CEO compensation contracts: do they appropriately incentivize managers and enhance shareholder value, and if so, why is there much variation in their use across firms?

The study, published recently in the Journal of Financial Economics, found that companies offer incentive-heavy compensation contracts to overconfident CEOs to "exploit" their positively biased views of the firms' prospects. The notion is that if managers and shareholders -- represented by the board -- have a different take on a firm's prospects and CEO talent, there will be greater use of incentive pay that the managers value highly, but the board regards as less costly.

"When you think about incentive contracts, you don't usually think about the personality of the individual being a factor in the contract," Nanda said. "You don't usually hear about how two profit-sharing agreements are going to look different because the personalities and the beliefs of the individuals are coming into play."

Using the compensation data of CEOs between 1992 and 2011, the researchers identified managers who were exhibiting behavior that was overconfident compared to other CEOs. They conducted empirical tests to explore the relationship between CEO overconfidence and incentive compensation.

The study shows that incentive compensation for CEOs is driven by individual traits and not merely firm-level characteristics.

"Are CEOs being given these contracts because they are serving an incentive function -- incentive contracts are supposed to say you'll get paid more if you do the right thing or work really hard -- or are they just being paid more because these CEOs value these contracts more?" Nanda said. "If a CEO believes the firm is going to do very well, maybe he will take a lot of his compensation in options and stock."

The researchers found that:
  • CEO overconfidence increases the proportions of total compensation that comes from both option grants and equity grants, compared to other executives.

  • Overconfident CEOs receive even greater option and equity intensity in innovative and risky firms.

  • Overconfident non-CEO executives also receive higher levels of options and equity.

"Incentive contracts are sometimes designed to be sensitive to these individual preferences," Nanda said. "Even at the same firm, I wouldn't necessarily give one manager the same contract that I would give to another manager who has a different belief about what's going on in the firm. Basically, one size doesn't fit all."

Dr. Mark Humphery-Jenner of UNSW Australia, Dr. Ling Lei Lisic of George Mason University, and Dr. Sabatino Dino Silveri of the University of Memphis are co-authors of the paper.

Defining an Overconfident CEO

Overconfident CEOs are prone to overestimate returns to investments and underestimate risks, Dr. Vikram Nanda said. They may use extremely positive words in the media or tend to invest more than a typical manager in the industry.

"It's good to have your enthusiasm and your confidence," Nanda said. "The question is, if it's too strong, is there something the firm can do -- such as giving you incentive contracts, or monitoring your behavior, or constricting what you can do -- to bring out the good side and constrain the bad aspects?"
-end-


University of Texas at Dallas

Related Behavior Articles:

Religious devotion as predictor of behavior
'Religious Devotion and Extrinsic Religiosity Affect In-group Altruism and Out-group Hostility Oppositely in Rural Jamaica,' suggests that a sincere belief in God -- religious devotion -- is unrelated to feelings of prejudice.
Brain stimulation influences honest behavior
Researchers at the University of Zurich have identified the brain mechanism that governs decisions between honesty and self-interest.
Brain pattern flexibility and behavior
The scientists analyzed an extensive data set of brain region connectivity from the NIH-funded Human Connectome Project (HCP) which is mapping neural connections in the brain and makes its data publicly available.
Butterflies: Agonistic display or courtship behavior?
A study shows that contests of butterflies occur only as erroneous courtships between sexually active males that are unable to distinguish the sex of the other butterflies.
Sedentary behavior associated with diabetic retinopathy
In a study published online by JAMA Ophthalmology, Paul D.
Curiosity has the power to change behavior for the better
Curiosity could be an effective tool to entice people into making smarter and sometimes healthier decisions, according to research presented at the annual convention of the American Psychological Association.
Campgrounds alter jay behavior
Anyone who's gone camping has seen birds foraging for picnic crumbs, and according to new research in The Condor: Ornithological Applications, the availability of food in campgrounds significantly alters jays' behavior and may even change how they interact with other bird species.
A new tool for forecasting the behavior of the microbiome
A team of investigators from Brigham and Women's Hospital and the University of Massachusetts have developed a suite of computer algorithms that can accurately predict the behavior of the microbiome -- the vast collection of microbes living on and inside the human body.
Is risk-taking behavior contagious?
Why do we sometimes decide to take risks and other times choose to play it safe?
Neural connectivity dictates altruistic behavior
A new study suggests that the specific alignment of neural networks in the brain dictates whether a person's altruism was motivated by selfish or altruistic behavior.

Related Behavior Reading:

Best Science Podcasts 2019

We have hand picked the best science podcasts for 2019. Sit back and enjoy new science podcasts updated daily from your favorite science news services and scientists.
Now Playing: TED Radio Hour

Moving Forward
When the life you've built slips out of your grasp, you're often told it's best to move on. But is that true? Instead of forgetting the past, TED speakers describe how we can move forward with it. Guests include writers Nora McInerny and Suleika Jaouad, and human rights advocate Lindy Lou Isonhood.
Now Playing: Science for the People

#527 Honey I CRISPR'd the Kids
This week we're coming to you from Awesome Con in Washington, D.C. There, host Bethany Brookshire led a panel of three amazing guests to talk about the promise and perils of CRISPR, and what happens now that CRISPR babies have (maybe?) been born. Featuring science writer Tina Saey, molecular biologist Anne Simon, and bioethicist Alan Regenberg. A Nobel Prize winner argues banning CRISPR babies won’t work Geneticists push for a 5-year global ban on gene-edited babies A CRISPR spin-off causes unintended typos in DNA News of the first gene-edited babies ignited a firestorm The researcher who created CRISPR twins defends...