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Director optimism and CEO equity compensation

Author

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  • Cook, Douglas O.
  • Chowdhury, Jaideep
  • Zhang, Weiwei

Abstract

Using a continuous measure of board optimism, we find that more optimistic boards offer CEOs a significantly lower proportion of option grants. Incorporating behavioral traits of directors and CEOs, we find that the within-firm optimism discrepancy is significantly associated with CEO compensation structure, and that the bargaining power of CEOs and corporate boards impact the relationship between the difference in optimism and CEO compensation structures. That is, more optimistic and powerful CEOs tend to negotiate compensation packages with greater proportions of equity-based pay and smaller proportions in cash. Interestingly, powerful but less optimistic boards exploit CEO optimism by offering them lower percentages of equity-based pay. On the other hand, CEO compensation contracts exhibit a higher intensity of equity-based pay in firms that have weak and less optimistic boards, thereby aligning with the preferences of optimistic CEOs. Our study contributes to the CEO compensation literature by investigating how the interaction of behavioral traits and bargaining power between corporate boards and CEOs can influence CEO compensation schemes.

Suggested Citation

  • Cook, Douglas O. & Chowdhury, Jaideep & Zhang, Weiwei, 2023. "Director optimism and CEO equity compensation," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 143-162.
    • Handle: RePEc:eee:empfin:v:72:y:2023:i:c:p:143-162
    DOI: 10.1016/j.jempfin.2023.03.010
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    More about this item

    Keywords

    Optimism; Board of directors; CEO equity compensation; CEO and board bargaining power;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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