Influencing Risk Taking in Competitive Environments: An Experimental Analysis.

• In Event: Management Control System Environments

Abstract

In the aftermath of the financial crisis, the effect of competitive compensation systems on risk taking has gained increasing attention, especially in the banking sector. Since renouncement of such incentive schemes entails crucial disadvantages regarding employee motivation, standard setters have proposed adding non-monetary instruments of control. This paper examines the influence of two of the most common instruments on risk taking in an experimental setting with a competitive incentive scheme: risk culture as a positive instrument of control and justification as a negative instrument of control. Consistent with our theory, we find both instruments offset higher risk taking under tournament incentives. However, the effect of justification is crowded out by risk culture. Since justification is considered a costlier instrument, companies should focus on risk culture instead of justification.

Authors

• Ivo Schedlinsky, University of Muenster

• Friedrich Sommer, University of Bayeuth

• Arnt Woehrmann, Giessen University