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Does bonus cap curb risk taking? An experimental study of relative performance pay and bonus regulation

Author

Listed:
  • Harris, Qun

    (Bank of England)

  • Tanaka, Misa

    (Bank of England)

  • Soane, Emma

    (London School of Economics and Political Science)

Abstract

We conducted a lab experiment with 253 participants to examine how constraints on bonus akin to bonus regulations, such as bonus cap and malus, could affect individuals’ risk-taking in the presence of relative performance pay. Participants took greater risks when bonus was linked to investment performance relative to that of their peers (relative performance pay) than when it depended on their own performance only. In the absence of relative performance pay, bonus cap and malus reduced risk-taking. With relative performance pay, the risk-mitigating effects of bonus cap and malus were significantly weakened; but participants took less risk when bonus was made conditional on their team avoiding a loss.

Suggested Citation

  • Harris, Qun & Tanaka, Misa & Soane, Emma, 2020. "Does bonus cap curb risk taking? An experimental study of relative performance pay and bonus regulation," Bank of England working papers 882, Bank of England.
    • Handle: RePEc:boe:boeewp:0882
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/does-bonus-cap-curb-risk-taking.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sakalauskaite, Ieva & Harris, Qun, 2022. "Measuring the effects of bank remuneration rules: evidence from the UK," Bank of England working papers 1008, Bank of England.
    2. Colonnello, Stefano & Koetter, Michael & Wagner, Konstantin, 2023. "Compensation regulation in banking: Executive director behavior and bank performance after the EU bonus cap," Journal of Accounting and Economics, Elsevier, vol. 76(1).

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    More about this item

    Keywords

    Bonus cap; malus; bonus regulation; risk choice;
    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
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • 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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