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 ...
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.
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