The Relationship Between Risk, Performance-Based Pay, and Organizational Performance
Bloom, Matthew C.; Milkovich, George T.
In this study, we argue that much of the recent agency-based research on performance based pay virtually omits the role of risk. This compensation research has predominantly taken the positive perspective and focused on the incentive properties of performance-based pay, thereby overlooking the important role that risk plays in normative formulations of agency theory (Holmstrom, 1979; Eisenhardt, 1989; Jensen & Meckling; 1976). Building on previous research, such as Beatty and Zajac (1994), we re-introduce risk by investigating its effects on the formation and outcomes of performance-based pay contracts. Specifically, our study examines both the main effects of risk on the structure of compensation contracts and the joint effects of risk and performance-based pay on firm performance. This study is based on data of incumbent managers from 356 companies over the period 1981 to 1988. Financial performance and market data were drawn from the CRSP and COMPUSTAT.
risk; performance; pay; compensation; firm; manager; companies; research; employee