Heaping of Executive Compensation

Abstract

ABSTRACT We investigate whether compensation grants are subject to “heaping,” the tendency of less informed individuals to provide round values when reporting estimates of discrete data. We document that an unexpectedly large number of CEOs receive round compensation (i.e., evenly divisible by 100,000 and/or 10,000). We investigate whether, consistent with heaping, the frequency of round compensation varies with proxies for boards of directors' effort in setting compensation. We find that round compensation is more common when boards have characteristics suggesting they provide weak oversight of compensation and thus face more uncertainty in estimating compensation. We also find less frequent round compensation when boards face stronger pressure from external stakeholders, encouraging boards to expend additional cognitive effort in setting compensation. Further, consistent with weak oversight of compensation, round compensation tends to be higher than non-round compensation. However, we do not find a consistent association between this higher, round compensation and future firm performance. JEL Classifications: G30; G41; M40; M46. Data Availability: Data are available from the public sources cited in the text.