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

Charles Cadsby, Fei Song () and Francis Tapon
Additional contact information
Fei Song: Ted Rogers School of Business Management, Ryerson University

No 912, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: We demonstrate that effectiveness of performance-contingent incentives is inversely related to individual risk-aversion levels through two mechanisms: 1) rational optimizing decisions about the amount of effort to supply when effort is positively correlated with risk exposure and 2) the possibly choke-inducing stress accompanying financial uncertainty. In two laboratory studies using real-effort tasks, we find a significant inverse relationship between productivity improvement under performance pay and risk-aversion levels. Moreover, we show that both mechanisms help explain this result. For about 25% of participants, performance actually deteriorates under performance pay, and the probability of such deterioration increases with risk aversion and stress.

Keywords: risk aversion; performance pay; incentive; stress; choking under pressure; productivity; pay for performance; piece rate; experiment; compensation. (search for similar items in EconPapers)
JEL-codes: C91 J33 M52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-exp, nep-lab and nep-upt
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Citations: View citations in EconPapers (18)

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Related works:
Chapter: The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2009-12

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