Risk, Employee Incentive Intensity and Firm Performance: Empirical Evidence

Abstract

The agent theory is of central importance to compensation contract, which argues that incentive intensity should be negatively associated with risk. Yet, previous studies have reported mixed findings on this relationship. This study empirically examines this relationship by utilizing data obtained from a major car dealership in Taiwan in which levels of delegation and monitoring costs are held constant. Our overall results support the prediction of agency theory, namely, that auto dealership branches reduce incentive intensity for salespersons when facing higher risks. Importantly, we find that branches giving salespersons lower incentive intensity in more risky environments perform better than those that do not employ compensation practices based on the agency theory.

Keywords: Risk, Compensation, Incentive Intensity, Performance