A Risk-Return Paradox: Risk, Performance-Based Pay and Performance

Abstract

[Excerpt] In recent years, strategy researchers have examined the relationship between business risk and performance. The logic underlying this relationship is that organizations facing greater business risk seek to offset it with the prospect of higher financial returns. The research typically involves various financial measures of organization performance regressed on measures of risk. Surprisingly, the findings are contradictory. While some studies report evidence supporting a positive relationship between the risk organizations face and their performance (Aaker & Jacobson, 1987; Fiegenbaum & Thomas, 1988), others reported an inverse relationship (Bowman, 1982, 1984). These different results called into question the basic premise about the form of the risk-return relationship and left a void in understanding why organization decision makers might pursue more risky strategies. Advancing this line of inquiry, Miller and Bromiley (1990) noted that business risk, like financial performance, is multi-dimensional. Several dimensions of business risk emerged from their work including income stream and strategic or financial risk. They suggested that differences reported in the risk-return relationship resulted from different operationalizations of business risk.