The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay

Charles Cadsby, Fei Song and Francis Tapon

A chapter in Experiments in Organizational Economics, 2016, vol. 19, pp 189-227 from Emerald Group Publishing Limited

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.

Keywords: Risk-aversion; performance-pay; incentive; stress; productivity; experiment; C91; J33; M52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: The Impact of Risk Aversion and Stress on the Incentive Effect of Performance Pay (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rexezz:s0193-230620160000019007

DOI: 10.1108/S0193-230620160000019007

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