How do bonus cap and malus affect risk and effort choice Insight from a lab experiment

Qun Harris (), Analise Mercieca (), Emma Soane () and Misa Tanaka
Additional contact information
Qun Harris: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Analise Mercieca: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Emma Soane: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 736, Bank of England working papers from Bank of England

Abstract: We conducted a lab experiment to examine how bonus caps and malus affect individuals’ choices of risk and effort. We find that a bonus structure that rewards individuals proportionally to realised investment returns, but does not penalise negative returns, encourages risk-taking; while a bonus cap and malus mitigate risk-taking. However, the difference in risk-taking between the bonus cap and malus treatment groups and the proportional bonus group weakened significantly when the participants’ bonus was conditional on hitting an absolute or relative performance target. We also find some evidence that the bonus cap discourages project search effort relative to the proportional bonus, whereas the difference in the levels of effort between the malus treatment group and the proportional bonus group was not statistically significant.

Keywords: Bonus cap; bonus regulation; incentive pay (search for similar items in EconPapers)
JEL-codes: C91 G28 G40 J33 M52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-07-06
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-hrm and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0736

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