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Illusory correlation in the remuneration of chief executive officers: It pays to play golf, and well

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Abstract

Illusory correlation refers to the use of information in decisions that is uncorrelated with the relevant criterion. We document illusory correlation in CEO compensation decisions by demonstrating that information, that is uncorrelated with corporate performance, is related to CEO compensation. We use publicly available data from the USA for the years 1998, 2000, 2002, and 2004 to examine the relations between golf handicaps of CEOs and corporate performance, on the one hand, and CEO compensation and golf handicaps, on the other hand. Although we find no relation between handicap and corporate performance, we do find a relation between handicap and CEO compensation. In short, golfers earn more than non-golfers and pay increases with golfing ability. We relate these findings to the difficulties of judging compensation for CEOs. To overcome this – and possibly other illusory correlations – in these kinds of decisions, we recommend the use of explicit, mechanical decision rules.

Suggested Citation

  • Gueorgui I. Kolev & Robin Hogarth, 2008. "Illusory correlation in the remuneration of chief executive officers: It pays to play golf, and well," Economics Working Papers 1132, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1132
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Illusory Correlations: When The Mind Makes Connections That Don’t Exist
      by ? in PsyBlog on 2013-05-09 18:38:00

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    Cited by:

    1. Gueorgui I. Kolev, 2013. "Two gold return puzzles," Economics Bulletin, AccessEcon, vol. 33(3), pages 1762-1770.
    2. Douglas Coate, 2017. "Varsity Sports Participation, College Selectivity, and First Job in Investment Banking or Management Consulting in the US," Working Papers Rutgers University, Newark 2017-001, Department of Economics, Rutgers University, Newark.

    More about this item

    Keywords

    Illusory correlation; executive compensation; golf handicaps; decision rules; LeeX;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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