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An experimental study of the effects of negative, capped and deferred bonuses on risk taking in a multi-period setting

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  • Frank Hartmann
  • Sergeja Slapničar

Abstract

As a response to the financial crisis in 2008, the European bank authorities have adopted new rules for managerial remuneration. These rules are intended to mitigate managerial propensity to excessive risk taking. The purpose of this paper is to examine three prominent recommendations in these remuneration rules: the use of negative bonuses, the use of bonus caps and the use of deferred bonus payment. The paper advances the theory that cognitive frames created by compensation design affect risk-taking behaviour. We conduct a two-by-two within-subject experiment in which 153 students are set an investment task involving two periods. We find higher risk taking with the high variance bonus scheme that contains a negative bonus option. While bonus deferral appears to have no such initial effect on risk taking, it affects risk behaviour in the second period as a response to positive and negative outcomes from the first period. The findings contribute to the theory and practice of bonus system design and the application of contemporary remuneration recommendations in the financial sector. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Frank Hartmann & Sergeja Slapničar, 2015. "An experimental study of the effects of negative, capped and deferred bonuses on risk taking in a multi-period setting," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 875-896, November.
    • Handle: RePEc:kap:jmgtgv:v:19:y:2015:i:4:p:875-896
    DOI: 10.1007/s10997-014-9297-6
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    Cited by:

    1. Harris, Qun & Mercieca, Analise & Soane, Emma & Tanaka, Misa, 2018. "How do bonus cap and malus affect risk and effort choice Insight from a lab experiment," Bank of England working papers 736, Bank of England.
    2. Sheedy, Elizabeth & Zhang, Le & Liao, Yin, 2023. "Deferred pay: Compliance and productivity with self-selection," Journal of Banking & Finance, Elsevier, vol. 154(C).
    3. Soane, Emma & Aufegger, Lisa, 2024. "Changing risk-taking: the effects of tasks and incentives on the variability of risk-taking," LSE Research Online Documents on Economics 124339, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Compensation scheme; Risky decision making; Inter-temporal choices; Negative bonus; Bonus deferral; Bonus cap; Banking; J33; G32;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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