Journal of Theoretical Accounting Research, Forthcoming
Posted: 3 Oct 2012 Last revised: 29 Jul 2014
Date Written: July 3, 2012
In a principal agent setting I show that the trade-off between risk and compensation is not monotonic. It is always beneficial for a company to offer a pay-per-performance contract that entails an additional performance measure that imposes more risk to the agent. The agent benefits from the imposition only if he is sufficiently risk averse and/or the additional performance measure is risky enough. The paper sheds light on the mixed results on the association between risk and incentives, and also offers some insight on organizational policies on incentives and communication.
Keywords: Incentives, risk, uncertainty, standard agency model
JEL Classification: J33, J41, G32, L22
Suggested Citation: Suggested Citation
Petacchi, Paolo, On the Trade-Off between Risk and Compensation (July 3, 2012). Journal of Theoretical Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2155737