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How do bonus cap and malus affect risk and effort choice Insight from a lab experiment

Author

Listed:
  • Qun Harris

    (Bank of England)

  • Analise Mercieca

    (Bank of England)

  • Emma Soane

    (Bank of England)

  • Misa Tanaka

    (Bank of England)

Abstract

We conducted a lab experiment to examine how bonus caps and malus affect individuals’ choices of risk and effort. We find that a bonus structure that rewards individuals proportionally to realised investment returns, but does not penalise negative returns, encourages risk-taking; while a bonus cap and malus mitigate risk-taking. However, the difference in risk-taking between the bonus cap and malus treatment groups and the proportional bonus group weakened significantly when the participants’ bonus was conditional on hitting an absolute or relative performance target. We also find some evidence that the bonus cap discourages project search effort relative to the proportional bonus, whereas the difference in the levels of effort between the malus treatment group and the proportional bonus group was not statistically significant.

Suggested Citation

  • Qun Harris & Analise Mercieca & Emma Soane & Misa Tanaka, 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.
    • Handle: RePEc:boe:boeewp:0736
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    References listed on IDEAS

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    More about this item

    Keywords

    Bonus cap; bonus regulation; incentive pay;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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