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Psychological pitfalls of incentives: how performance targets drive executive misconduct

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  • Zhu, Jinghua
  • Lin, Yifan
  • Hua, Min

Abstract

This study examines how the aggressiveness of performance target setting affects executive misconduct. Drawing on agency and behavioral decision theories, it conceptualizes overly ambitious targets as psychological traps that heighten managerial stress and the likelihood of unethical conduct. Using a multiperiod fixed-effects panel model based on Chinese A-share listed firms, the results show that aggressive targets significantly increase the probability, frequency, and severity of misconduct. Further analysis indicates that this effect operates through heightened managerial pessimism, intensified short-term incentives, and weakened internal governance. These findings deepen our understanding of the behavioral risks in incentive systems and highlight the unintended consequences of high-pressure performance management. The study offers implications for corporate boards and regulators, emphasizing the need to balance performance incentives with ethical safeguards and to foster emotional resilience in executive development and oversight.

Suggested Citation

  • Zhu, Jinghua & Lin, Yifan & Hua, Min, 2026. "Psychological pitfalls of incentives: how performance targets drive executive misconduct," Finance Research Letters, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finlet:v:87:y:2026:i:c:s1544612325021658
    DOI: 10.1016/j.frl.2025.108912
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