Can CEO overconfidence help explain pay inequalities in top management teams? Tournament literature argues that pay gaps between different executive echelons increase competition among executives in the goal to replace the incumbent CEO and by so doing incentivize all top management team members to provide more effort. The increase in incentives can in turn lead to firm‐level performance improvement especially in corporations where agency conflicts are severe. However, entrenchment seeking CEOs can be reluctant to this kind of incentivizing mechanisms. In this paper, we model such a context and show how overconfident CEOs are more likely to administer tournament‐like incentives than realistic CEOs. Hence, we describe a novel and underexplored way in which CEO overconfidence can be beneficial to shareholders.