Performance Pay and Risk Aversion

13 Pages Posted: 13 Mar 2006

See all articles by Dirk Sliwka

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Christian Grund

RWTH Aachen University - School of Economics and Business Administration; IZA Institute of Labor Economics

Date Written: March 2006

Abstract

A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.

Keywords: risk, incentives, agency theory, risk aversion, performance appraisal, pay for

JEL Classification: J33, M52, D80

Suggested Citation

Sliwka, Dirk and Grund, Christian, Performance Pay and Risk Aversion (March 2006). IZA Discussion Paper No. 2012. Available at SSRN: https://ssrn.com/abstract=890296

Dirk Sliwka (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Christian Grund

RWTH Aachen University - School of Economics and Business Administration ( email )

Aachen
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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