The effects of a long-term compensation plan on risky choices

Abstract

Long-term compensation plans have been suggested as means of providing incentives to the managers to maximise stockholders' welfare. There is no direct evidence that the existence of these plans will change the decision-making behaviour of individual managers. The following study examined the effect of a long-term compensation plan on risky choice behaviour. Two experiments indicate that risky choices will vary depending on the coding of the outcomes. Participants were risk seeking when presented with the possibility of losses, but risk averse for gains. It is then shown that the introduction of a long-term compensation plan appears to cause the participants to make less risk averse choices.

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