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

Gueorgui Kolev and Robin Hogarth ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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.

Keywords: Illusory correlation; executive compensation; golf handicaps; decision rules; LeeX (search for similar items in EconPapers)
JEL-codes: D03 D81 J33 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1132

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