Overconfidence and large executive salaries are linked, with significant implications for HR

Abstract

Purpose

The purpose of this paper is to argue that large executive compensation can be one of the reasons why so many chief executive officers (CEOs) are overconfident. It also discusses the implications of this finding for boards and human resource directors.

Design/methodology/approach

The research investigated how overconfidence – an overestimation of ability – affects how hard people work to win an elimination contest. These kinds of contests exist in the workplace where employees strive for a senior position or CEO role. The study involved a two-stage contest with four players. The first stage consists of two semi-finals. The two semi-final winners move on to compete in the second stage, the final. Overconfident players overestimate the impact of effort on their probability of winning at each stage. Each player is deemed the same, aside from their confidence levels. Finally, the study assumes an overconfident player’s bias is observable by rivals.

Findings

Overconfident individuals can have the highest chance of winning elimination contests compared to more rational rivals. When executive pay is high, and overconfidence is not too extreme, they exert more effort than their rational rivals in the semi-finals. High executive pay, or in this case, prize money, is more appealing to overconfident individuals because they think they are more likely to win the bigger prize money in the final. This can be likened to people’s careers. High executive pay incentivises overconfident employees more and they exert more effort early in their careers to achieve this.

Originality/value

To the best of the authors’ knowledge, this is one of the first studies to measure the impact of overconfidence on elimination contests, providing a new explanation for why overconfident employees often reach CEO positions. This has implications for how HR practitioners should manage overconfident and rational employees, including the effort they deliver to a business.

Citation

Santos-Pinto, L. and Chen, Y. (2024), "Overconfidence and large executive salaries are linked, with significant implications for HR", Strategic HR Review, Vol. 23 No. 6, pp. 230-233. https://doi.org/10.1108/SHR-07-2024-0047