An Organizational Approach to Financial Risk-Taking: The Role of Firm Compensation Plans

• In Event: 4255 - Section on Economic Sociology Roundtables (1 hour)
  In Refereed Roundtable 60min: 3. Finance

Abstract

This study proposes and tests a novel explanation for individual variation in financial risk-taking that operates at the organizational level, namely, the role of firm compensation plans. In the course of financialization of the U.S. economy, American employers increasingly introduced new compensation plans as a labor management tool to reward, retain, and attract employees. However, these compensation plans also may have had an unintended consequence of socializing employees into financial risk-taking through exposing them to financial instruments or shaping the social meaning of money received as part of compensation above base pay. Drawing on data from a survey of employees in fourteen American companies, I show that both individual- and group-based (i.e., profit and gain sharing) bonus plans are associated with higher financial risk-taking among employees, potentially due to their social meaning of extra addendum to base earnings. In contrast, 401(k) pension plans are associated with lower levels of financial risk-taking among employees, possibly reflecting risk aversion with respect to financial security at old age. Finally, equity-sharing compensation plans (i.e., stock options, stock purchase plans, and employee stock ownership plans) show no significant associations with employees’ financial risk-taking.

Author

• Angelina Grigoryeva, University of Toronto