How Incentive System Design Affects Risk-Taking: A Literature Review

43 Pages Posted: 15 May 2019

See all articles by Niklas Kreilkamp

Niklas Kreilkamp

University of Giessen

Sascha Matanovic

University of Giessen

Maximilian Schmidt

University of Giessen

Arnt Wöhrmann

University of Giessen

Date Written: April 16, 2019

Abstract

Due to agency problems, firms use management control systems to motivate employees to act in the firms’ interest. This process includes motivating employees to increase effort as well as aligning risk preferences. Whereas Bonner and Sprinkle (2002) review and discuss research findings regarding the effects of monetary incentives on effort and performance, we approach the latter component, i.e., risk. Our purpose is to systematically present and review research findings regarding the effects of monetary incentives on risk-taking. We thus distinguish between individual performance-based pay, equity-based pay and tournament compensation. Further, implications for incentive system design in practical application as well as paths for future research are discussed. On the one hand, we provide suggestions on how to increase employee risk-taking and reduce loss aversive behavior. On the other hand, we discuss instruments that prevent employees from taking high (excessive) risks. Ultimately, when designing incentive systems, it is always crucial to consider the potential effects on effort as well as risk-taking.

Keywords: risk-taking, risk behavior, compensation system, management control systems

JEL Classification: M12, M41, M52

Suggested Citation

Kreilkamp, Niklas and Matanovic, Sascha and Schmidt, Maximilian and Wöhrmann, Arnt, How Incentive System Design Affects Risk-Taking: A Literature Review (April 16, 2019). Available at SSRN: https://ssrn.com/abstract=3373121 or http://dx.doi.org/10.2139/ssrn.3373121

Niklas Kreilkamp

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
Giessen, 35394
Germany

Sascha Matanovic

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
Giessen, 35394
Germany
+496419922263 (Phone)
+496419922269 (Fax)

HOME PAGE: http://www.uni-giessen.de/fbz/fb02/fb/professuren/bwl/BWL-IV

Maximilian Schmidt

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
Gießen, 35394
Germany

Arnt Wöhrmann (Contact Author)

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
35394, 35394
Germany

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