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

In: Experiments in Organizational Economics

Author

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  • C. Bram Cadsby
  • Fei Song
  • Francis Tapon

Abstract

We demonstrate in a laboratory experiment that the effectiveness of performance-contingent incentives is inversely related to risk-aversion levels. For about 16.5% of participants, performance fails to improve under performance-pay, and the probability of such failure increases with risk-aversion. This phenomenon works in part through the reduced effort level of more risk-averse individuals when effort level is positively correlated with risk exposure. It is also associated with higher self-reported levels of stress by more risk-averse people working under performance-contingent pay. We find no evidence of such stress causing decrements in the quality of effort affecting performance after controlling for effort level. However, controlling for effort, more risk-averse participants perform better under a fixed salary, leaving less room for improvement under performance-pay.

Suggested Citation

  • C. Bram Cadsby & Fei Song & Francis Tapon, 2016. "The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay," Research in Experimental Economics, in: Experiments in Organizational Economics, volume 19, pages 189-227, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:rexezz:s0193-230620160000019007
    DOI: 10.1108/S0193-230620160000019007
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    Citations

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    Cited by:

    1. Marco A. Marini & Paolo Polidori & Désirée Teobaldelli & Davide Ticchi, 2018. "Optimal Incentives in a Principal–Agent Model with Endogenous Technology," Games, MDPI, vol. 9(1), pages 1-13, February.
    2. Mehrzad B. Baktash & John S. Heywood & Uwe Jirjahn, 2022. "Performance pay and alcohol use in Germany," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 61(4), pages 353-383, October.
    3. Benjamin Artz & Colin P. Green & John S. Heywood, 2021. "Does performance pay increase alcohol and drug use?," Journal of Population Economics, Springer;European Society for Population Economics, vol. 34(3), pages 969-1002, July.
    4. Stefan Linder & Bernard Leca & Adrián Zicari & Veronica Casarin, 2021. "Designing Ethical Management Control: Overcoming the Harmful Effect of Management Control Systems on Job-Related Stress," Journal of Business Ethics, Springer, vol. 172(4), pages 747-764, September.
    5. Joaquin Artes & Jennifer Graves & Meryl Motika, 2019. "Creativity under Pressure: Performance Payments, Task Type and Productivity," Working Papers 20190028, New York University Abu Dhabi, Department of Social Science, revised Oct 2019.
    6. Zubanov, Nick & Cadsby, Bram & Song, Fei, 2017. "The," IZA Discussion Papers 10542, Institute of Labor Economics (IZA).
    7. C. Bram Cadsby & Jim Engle-Warnick & Tony Fang & Fei Song, 2014. "Psychological Incentives, Financial Incentives, and Risk Attitudes in Tournaments: An Artefactual Field Experiment," Working Papers 1403, University of Guelph, Department of Economics and Finance.
    8. Allan, Julia L. & Andelic, Nicole & Bender, Keith A. & Powell, Daniel & Stoffel, Sandro & Theodossiou, Ioannis, 2021. "Employment contracts and stress: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 360-373.
    9. Baktash, Mehrzad B. & Heywood, John S. & Jirjahn, Uwe, 2022. "Worker stress and performance pay: German survey evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 201(C), pages 276-291.
    10. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    11. Cadsby, C. Bram & Song, Fei & Engle-Warnick, Jim & Fang, Tony, 2019. "Invoking social comparison to improve performance by ranking employees: The moderating effects of public ranking, rank pay, and individual risk attitude," Journal of Economic Psychology, Elsevier, vol. 72(C), pages 64-79.
    12. Zubanov, N.V., 2012. "Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence," ERIM Report Series Research in Management ERS-2012-005-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    13. Lubomír Cingl, 2013. "Does Herd Behaviour Arise Easier Under Time Pressure? Experimental Approach," Prague Economic Papers, Prague University of Economics and Business, vol. 2013(4), pages 558-582.

    More about this item

    Keywords

    Risk-aversion; performance-pay; incentive; stress; productivity; experiment; C91; J33; M52;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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