Influencing risk taking in competitive environments: an experimental analysis
Abstract
Purpose
In the aftermath of the financial crisis, the influence of competitive compensation systems on employee risk taking has gained increasing attention. As the renouncement of such incentive schemes might entail severe disadvantages regarding employee motivation, standard setters have proposed adding nonmonetary instruments of control. This paper aims to examine the influence of two of the most common instruments: a risk-sensitizing code of conduct and justification.
Design/methodology/approach
A laboratory experiment with 136 business students is conducted to test the hypotheses and answer the research question. The presence and absence of a risk-sensitizing code of conduct and a justification system is manipulated between subjects. The experiment consists of ten rounds, with round as the third factor manipulated within subjects.
Findings
Consistent with the paper’s hypothesis and the underlying theory, both instruments are found to offset higher risk taking. The paper shows that the motivation of individuals triggered by justification depends on a risk-sensitizing code of conduct, and insights into the psychological mechanisms behind the findings are provided.
Practical implications
As justification is considered more costly than a risk-sensitizing code of conduct, establishing the latter instead of the former seems preferable in most situations. However, if organizational citizenship behavior is unlikely to evolve, justification can substitute it for managing employee risk taking.
Originality/value
This paper identifies the risk-sensitizing code of conduct as an informal instrument of control for managing risk taking. Prior research mainly focuses on potentially more costly formal instruments of control.
Keywords
Acknowledgements
The authors thank Martin R.W. Hiebl (guest editor), two anonymous reviewers, Ivo Tafkov and James Wilhelm (discussant), as well as participants at the 2016 Experimental Research in Management Accounting Workshop, the 2017 Accounting, Behavior and Organizations Research Conference and the 5th Annual Conference on Risk Governance hosted by the University of Siegen for their helpful comments and suggestions.
Citation
Schedlinsky, I., Sommer, F. and Wöhrmann, A. (2018), "Influencing risk taking in competitive environments: an experimental analysis", Journal of Risk Finance, Vol. 19 No. 4, pp. 396-412. https://doi.org/10.1108/JRF-11-2017-0193
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited