The Effect of Compensation Caps on Risk-Taking

Journal of Management Accounting Research, https://doi.org/10.2308/JMAR-18-053

Posted: 24 Aug 2018 Last revised: 25 Sep 2020

See all articles by Niklas Kreilkamp

Niklas Kreilkamp

University of Giessen

Sascha Matanovic

University of Giessen

Friedrich Sommer

University of Bayreuth

Arnt Wöhrmann

Justus-Liebig-University Giessen

Date Written: September 16, 2019

Abstract

Using an experiment, we investigate the joint effects of compensation caps and formal justification requirements on risk-taking. Compensation caps restrict the earnings potential of decision-makers and have been implemented to influence risk-taking behavior, especially after the financial crisis. Rational choice theory predicts that caps should restrict only risk-seeking decision-makers from taking undesired risk and not affect risk-averse decision-makers. Based on the compromise effect, however, we predict that compensation caps will also affect risk-averse decision-makers. Moreover, we posit that the effect of compensation caps on risk-averse decision-makers is stronger in the presence of high justification pressure. Our results support both hypotheses and indicate that compensation caps have unintended consequences. In particular, risk-averse decision-makers also take less risk when their compensation is capped, especially in combination with justification requirements, which are another frequently used instrument to steer risk-taking. The result might be dysfunctionally low levels of risk-taking for exploiting entrepreneurial opportunities.

Keywords: risk-taking, risk behavior, justification, compensation caps

JEL Classification: M12, M41, M52

Suggested Citation

Kreilkamp, Niklas and Matanovic, Sascha and Sommer, Friedrich and Wöhrmann, Arnt, The Effect of Compensation Caps on Risk-Taking (September 16, 2019). Journal of Management Accounting Research, https://doi.org/10.2308/JMAR-18-053, Available at SSRN: https://ssrn.com/abstract=3230978 or http://dx.doi.org/10.2139/ssrn.3230978

Niklas Kreilkamp

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
Giessen, 35394
Germany

Sascha Matanovic

University of Giessen ( email )

Managerial Accounting
Licher Str. 62
Giessen, 35394
Germany
+496419922263 (Phone)
+496419922269 (Fax)

HOME PAGE: http://www.uni-giessen.de/fbz/fb02/fb/professuren/bwl/BWL-IV

Friedrich Sommer (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Arnt Wöhrmann

Justus-Liebig-University Giessen ( email )

Managerial Accounting
Licher Str. 62
35394, 35394
Germany

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