Introduction

In the past years, headlines have concentrated on the high compensation incentives and salaries for chief executive officers (CEOs) all over the globe (Morgenson, 2013, n.p). The issues are linked with top management bonus and compensation systems, which have instigated problems over the previous few decades (Spector and Spital, 2011, P. 315). Incentive systems have become popular in several organizations and can be initiated in various institutional levels within a firm, but the institutions' top management typically gets the highest substantial bonus. Bonuses are usually a variable compensation that is based on performance within an organization and is supposed to act as an incentive tool for individuals to improve their performance. In the present years, the CEOs' compensation has increased significantly, with more significant overall benefit, the enhanced spread of pay, and a tremendous rise in application of the reward systems (Frydman and Jenter, 2010, p. 75).

Recently, researchers have conducted studies to determine the strategy being adopted by companies to assess compensation incentives and bonuses for CEOs (Cadman, Klasa, and Matsunaga, 2010, p. 1511). Researchers have argued that their confidence levels on organizational policies determine the incentives and rewards received by top management. Since overoptimistic CEOs are subjected to overestimating revenues to investments and underestimating the risks, the companies are inclined to paying high compensation incentives (Kolasinski and Li, 2013, p. 1173). The purpose of this study is to determine whether organizations are considering the executive’s personal traits during the structuring of compensation incentive pays as a performance measure.

Problem Statement

In the past years, there have been debates over the compensation bonuses and incentive levels being given to CEOs. The criterion of adoption of these methods of pay determinants also is in question. Performance sensitivity and level of payment vary over time and in different institutions (Edmans et al., 2012, p. 1603). The question researchers are trying to explore is whether the incentive pay is being determined by their performance, or is it a specific trend being followed. The CEOs' compensation in the past has been increasing tremendously without any justification from their performances (Mishel and Schieder, 2018, n.p). Recent studies have based their arguments on executive personal traits as a measure of performance for top management (Otto, 2014, p. 366; Humphery-Jenner et al., 2016, p.533). According to the researchers, companies are giving hefty compensation incentives to overconfident CEOs because they wish to utilize their positive biased views of the projections of the firm. Firms have begun structuring compensations and payment systems relying on the personality of the prospective managers and not just the organization’s features. Prior literature shows that firms consider these hefty contracts as incentives to motivate and attract these CEO’s to the firm despite their projections being full of exaggeration and bias. The personality of an individual is never a factor when firms are preparing incentive contracts. Following past studies, this paper will try to establish whether there is an association between their incentive pay and executive personal traits, as well as determining other personality traits that may impact the incentive level.

Research Questions

The chief purpose of the research is to determine whether firms are using the executive’s personal traits as a basis of structuring their compensation incentive pay. The study aims at addressing the following research objectives:

·         To establish the current strategies being used by firms to determine CEOs' incentive pay.

·         To determine if executive personal traits such as overconfidence play a role in the compensation level.

·         To investigate whether the CEO's performance, such as EPS or firm profit, is measured using overconfidence.