Incentives and Culture in Risk Compliance

Posted: 16 Aug 2017 Last revised: 27 Aug 2019

See all articles by Elizabeth A. Sheedy

Elizabeth A. Sheedy

Macquarie University Department of Applied Finance; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Le Zhang

Macquarie University - Macquarie Graduate School of Management; Macquarie University, Macquarie Business School

Kenny Tam

Macquarie University

Date Written: November 10, 2017

Abstract

In the finance industry, risk compliance has become an important issue after numerous policy violations resulting in significant costs for financial institutions and society as a whole. Little evidence currently exists on the drivers of non-compliant behavior. We run a lab-in-the-field experiment with 269 finance professionals, to investigate the effects of financial incentives and workplace culture on risk compliance. The experiment mimics the typical financial services workplace where staff are expected to generate profits by taking risk on behalf of the employer while remaining compliant with risk policy/limits.

Relative to variable remuneration (linked to expected profits), fixed remuneration increases compliance rates by as much as 25.1 percentage points. This is achieved with no loss of productivity (measured by the number of compliant investments participants completed in the laboratory). Introducing a risk-focused workplace culture increases compliance at the individual level by a substantial 19.3 percentage points, even in the presence of variable remuneration. Once again, this is achieved without loss of productivity. Favorable personal attitudes to risk management/compliance also increase compliance rates.

Keywords: Risk Culture, Compliance, Variable Remuneration

JEL Classification: C91, G21, G32, G41, J3, M14, M52

Suggested Citation

Sheedy, Elizabeth A. and Zhang, Le and Tam, Kenny, Incentives and Culture in Risk Compliance (November 10, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=3018901 or http://dx.doi.org/10.2139/ssrn.3018901

Elizabeth A. Sheedy (Contact Author)

Macquarie University Department of Applied Finance ( email )

Room 739, 4 Eastern Road
Macquarie University
North Ryde, NSW 2109
Australia
61-2-9850 7755 (Phone)
61-2-9850 7281 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Le Zhang

Macquarie University - Macquarie Graduate School of Management ( email )

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Kenny Tam

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

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