The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay
Experiments in Organizational Economics
ISBN: 978-1-78560-964-0, eISBN: 978-1-78560-963-3
Publication date: 18 December 2016
Abstract
We demonstrate in a laboratory experiment that the effectiveness of performance-contingent incentives is inversely related to risk-aversion levels. For about 16.5% of participants, performance fails to improve under performance-pay, and the probability of such failure increases with risk-aversion. This phenomenon works in part through the reduced effort level of more risk-averse individuals when effort level is positively correlated with risk exposure. It is also associated with higher self-reported levels of stress by more risk-averse people working under performance-contingent pay. We find no evidence of such stress causing decrements in the quality of effort affecting performance after controlling for effort level. However, controlling for effort, more risk-averse participants perform better under a fixed salary, leaving less room for improvement under performance-pay.
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Acknowledgements
Acknowledgments
We gratefully acknowledge funding from SSHRC grants #410-2007-1380 (Cadsby) and #2006-410-138 (Song). We are greatly indebted to J. Atsu Amegashie for many important and stimulating discussions and suggestions. We are also grateful to James Cox, Mike Hoy, Ling Liu, Alex Maynard, Thanasis Stengos, and seminar audiences at the University of Guelph, University of Waterloo, University of Tasmania, and University of Sydney for many helpful suggestions and comments. Thoughtful comments and suggestions by Sebastian J. Goerg and John R. Hamman, the Volume Editors of Research in Experimental Economics, volume 19, and three anonymous referees helped us to improve the paper.
Citation
Cadsby, C.B., Song, F. and Tapon, F. (2016), "The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay", Experiments in Organizational Economics (Research in Experimental Economics, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 189-227. https://doi.org/10.1108/S0193-230620160000019007
Publisher
:Emerald Group Publishing Limited
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