The effect of compensation caps on risk-taking
Kreilkamp N, Matanovic S, Sommer F, Wöhrmann A (2021)
Publication Type: Journal article
Publication year: 2021
Journal
Book Volume: 33
Pages Range: 77-95
Journal Issue: 3
DOI: 10.2308/JMAR-18-053
Abstract
Using an experiment, we investigate the joint effects of compensation caps and formal justification requirements on risk-taking. Compensation caps restrict the earnings potential of decision-makers and have been implemented to influence risk-taking behavior, especially after the financial crisis. Rational choice theory predicts that caps should restrict only risk-seeking decision-makers from taking undesired risk and not affect risk-averse decision-makers. Based on the compromise effect, however, we predict that compensation caps will also affect risk-averse decision-makers. Moreover, we posit that the effect of compensation caps on risk-averse decision-makers is stronger under high justification pressure. Our results support both hypotheses and indicate unintended consequences of compensation caps. In particular, risk-averse decision-makers also take less risk when their compensation is capped, especially in combination with justification requirements. The result might be dysfunction-ally low levels of risk-taking for exploiting entrepreneurial opportunities.
Involved external institutions
Germany (DE)How to cite
APA:
Kreilkamp, N., Matanovic, S., Sommer, F., & Wöhrmann, A. (2021). The effect of compensation caps on risk-taking. Journal of Management Accounting Research, 33(3), 77-95. https://doi.org/10.2308/JMAR-18-053
MLA:
Kreilkamp, Niklas, et al. "The effect of compensation caps on risk-taking." Journal of Management Accounting Research 33.3 (2021): 77-95.
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