The Effect of Compensation Interdependence on Excessive Risk Taking—The Role of Mutual Monitoring

• In Event: Monitoring

Abstract

This study investigates how the effect of compensation interdependence (absent or present) on excessive risk taking depends on the existence of mutual monitoring of risky decisions. We predict that due to impression management concerns excessive risk taking under mutual monitoring is higher if compensation interdependence is present rather than absent, while there is no effect under the absence of mutual monitoring. Using an experiment, we find that the effect of compensation interdependence in fact depends on the existence of mutual monitoring. Our findings have important implications for firms using interdependent compensation systems as higher excessive risk taking can be considered a hidden cost of compensation interdependence in traditional workplaces where mutual monitoring of decisions is usually present, while these hidden costs are less likely to occur in more modern forms of work like telecommuting or hot-desking.

Authors

• Felix Bolduan, University of Bayreuth

• Ivo Schedlinsky, University of Bayreuth

• Friedrich Sommer, University of Bayreuth