K eilkamp, Niklas; Ma ano ic, Sascha; Schmid , Maximilian; Wöh mann, A n
A icle — Published Ve sion
How execu i e incen i e design a ec s isk- aking: a
li e a u e e iew
Re iew o Manage ial Science
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Sugges ed Ci a ion: K eilkamp, Niklas; Ma ano ic, Sascha; Schmid , Maximilian; Wöh mann, A n
(2022) : How execu i e incen i e design a ec s isk- aking: a li e a u e e iew, Re iew o Manage ial
Science, ISSN 1863-6691, Sp inge , Be lin, Heidelbe g, Vol. 17, Iss. 7, pp. 2349-2374,
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ORIGINAL PAPER
Re iew o Manage ial Science (2023) 17:2349–2374
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Abs ac
This pape p esen s a e iew o esea ch ega ding he e ec s o mone a y execu i e
incen i es on isk- aking. Mo e p ecisely, we in es iga e execu i es’ isk- aking (i)
in esponse o he cu a u e (s eepness, con exi y, conca i y) o he compensa ion
unc ion and (ii) wi h ega d o e e ence poin s. The eby, we e ine and upda e
common ex book knowledge. In his ein, we iden i y essen ial mode a o s a he
pe sonal, i m, o en i onmen al le el ha can be used o assess he e ec i eness o
he incen i e scheme in a speci ic con ex . Implica ions o incen i e sys em design
in p ac ice and pa hs o u u e esea ch a e discussed.
Keywo ds Risk- aking · Risk beha io · Incen i es · Managemen con ol sys ems
JEL M12 · M41 · M52
1 In oduc ion
Mone a y incen i es appea o be an e ec i e mechanism o di ec isk- aking beha -
io (Sp inkle and Williamson 2008). Managing isk- aking is necessa y as employ-
ees’ isk p e e ences do no , on a e age, ma ch he i ms’ p e e ences (Baiman 1990).
This is pa icula ly impo an o execu i es in cha ge o long- ange business deci-
sions. I an execu i e p e e s a lowe o highe le el o isk han he i m owne s,
Recei ed: 6 Janua y 2020 / Accep ed: 10 Augus 2022 / Published online: 9 Sep embe 2022
© The Au ho (s) 2022
How execu i e incen i e design a ec s isk- aking: a
li e a u e e iew
NiklasK eilkamp1· SaschaMa ano ic1· MaximilianSchmid 1·
A n Wöh mann1
We a e g a e ul o inancial suppo om D . We ne Jacks äd -S i ung.
A n Wöh mann
A n .W[email p o ec ed]
1 Giessen Uni e si y, Liche S . 62, 35394 Giessen, Ge many
1 3
N. K eilkamp e al.
isk- aking is oo low o oo high (i.e., excessi e) om he i m’s pe spec i e.1 Com-
pensa ion should align bo h pa ies’ in e es s (I ne and La cke 2001).
Va ious examples om business p ac ice show ha inapp op ia e incen i es ha m
i m pe o mance. The 2007–2009 inancial c isis and he collapse o Lehman B o h-
e s a e bold examples o how excessi e isk- aking can bank up inancial ins i u ions
and a ec he en i e economy (Williams 2010). In e ospec , he public and many
na ional go e nmen s claimed ha high bonuses o banke s—some imes e e ed
o as he “Wall S ee bonus cul u e”— ueled excessi e isk- aking and, hence, he
inancial c isis.
While excessi e isk- aking migh des oy i ms, he same holds when manag-
e s hesi a e o ake “economically easonable” isks, as isk- aking is c ucial o
i ms’ su i al and compe i i eness (Shapi a 1995). In a case s udy indica i ely i led
“Kodak and Xe ox: How High Risk A e sion Kills Companies”, Cu hbe son e al.
(2015) a i e a a ema kable conclusion conce ning he consequences o di e en
isk s a egies: The au ho s desc ibe Kodak as ha ing ailed o engage in su icien
isk- aking. When new echnologies such as digi al pho og aphy eme ged, Kodak’s
co e ma ke was cannibalized, and key pa s o Kodak’s co e business had o be
pu on sale. Xe ox aced a simila si ua ion wi h eg essing co e ma ke s. Howe e ,
Xe ox pe o med be e due o a g ea e willingness o in es in isky R&D p ojec s.
Beha io al and economic heo ies conside compensa ion a help ul ins umen in
imp o ing i m pe o mance by di ec ing isk- aking beha io . Thus, we e iew he
li e a u e ha in es iga es execu i es’ isk- aking in esponse o he cu a u e o he
compensa ion unc ion and wi h ega d o e e ence poin s. Mo e p ecisely, we aim
o accomplish he ollowing objec i es.
Fi s , we p o ide a amewo k o he e ec s o mone a y incen i e design choices
on isk- aking on a heo e ical le el. Fo his eason, we discuss agency heo y
(expec ed u ili y heo y), p ospec heo y, secu i y-po en ial/aspi a ion (SP/A) he-
o y, and he beha io al agency model (BAM). Unde s anding he unde lying heo e i-
cal implica ions is c i ical o iden i ying he d i e s o isk- aking and assessing how
o maximize he e ec i eness o incen i es.
Ou second goal is o de ec and ca ego ize incen i e design choices conce ning
hei po en ial o a ec isk- aking beha io . We iden i y he compensa ion unc ion
and e e ence poin s as he co e d i e s o isk- aking.
Thi d, we e iew, desc ibe, and compa e s udies om di e en li e a u e s eams,
including accoun ing, economics, inance, managemen , and psychology. In addi ion,
we p o ide g aphical o e iews ha summa ize signi ican mode a ing e ec s and
he unde lying mechanisms o each compensa ion scheme discussed. Finally, we
iden i y and discuss di ec ions o u u e esea ch.
Ou e iew makes se e al con ibu ions o heo y and p ac ice. Fi s , by collec ing
and p esen ing he a ious indings o empi ical esea ch, we e ine and upda e he
common unde s anding o he main e ec o incen i es on isk- aking. Fo example,
1 The li e a u e we e iew usually employs less-gene al de ini ions o excessi e o oo li le isk- aking
and elies on de ia ions om maximizing expec ed alue. Fo example, B ink e al. (2017, p. 14) de ine
excessi e isk- aking as “a manage aking on mo e isk han is op imal o maximizing he expec ed alue
o he i m.”
1 3
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How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
i appea s ex book knowledge ha conca i y o he compensa ion unc ion, induced,
e.g., by capped compensa ion schemes, educes isk- aking. While we p o ide an
o e iew o empi ical s udies ha a e in line wi h his expec a ion, we also add unin-
ui i e indings. A case in poin is a s udy showing ha a cap unin en ionally educes
also he le el o isk aken by hose who a e no economically a ec ed by he cap and
ake oo low le els o isk anyway (K eilkamp e al. 2021).
Second, we also e ine common knowledge by iden i ying mode a o s o he
e ec o incen i es on isk- aking. Fi ms mus be awa e o hese mode a o s o unde -
s and ha incen i e schemes do no ollow a “one- i s-all” app oach. Fo example, i
is well known ha s ock op ions esul in con ex compensa ion unc ions and induce
isk- aking. Ou e iew o mode a o s e eals ha , e.g., he isk-inducing e ec o
s ock op ions is mo e p onounced o small compa ed o la ge i ms. Re iewing
p io esea ch, we ind ha some mode a o s, such as i m size, enu e, o le e -
age, appea mo e impo an han o he s, as hey p o e signi ican in mul iple s udies.
Fi ms should conside such mode a o s on h ee le els, i.e., pe sonal, i m, and en i-
onmen al. We collec and p esen mode a o s o hese le els. Supe iso y boa ds o
o he s migh use ou summa ies (Figs. 4, 5 and 6) o assess he e ec i eness o he
incen i e scheme in place.
Thi d, while he i s pa o ou e iew ocuses on he compensa ion unc ion,
he second pa illus a es ha i is no only he compensa ion amoun , s uc u e, o
iming ha ma e s bu also how i ela es o impo an in e nal o ex e nal e e ence
poin s (e.g., pas compensa ion, pee compensa ion). Ou e iew highligh s a com-
mon ea u e o di e en compensa ion mechanisms such as op ion-based compensa-
ion and ou namen s, i.e., e e ence poin dependency. An impo an insigh is ha o
unde s and o p edic an execu i e’s beha io in a speci ic si ua ion, i is no su icien
o conside he incen i e scheme and po en ial mode a o s. In addi ion, i is necessa y
o iden i y wha e e ence poin s a e likely o be aken in o accoun by his execu i e.
F om a p ac ical pe spec i e, supe iso y boa ds migh use a poo anking posi ion
o a - he-money s ock op ions as ed lags o an execu i e’s p edic ed—po en ially
excessi e— isk- aking.
Finally, ou e iew p o ides a enues o u u e esea ch. Fu u e esea ch migh ,
e.g., compa e di e en means o es ablish a ce ain le el o isk- aking (e.g., caps
and inside deb ) o in es iga e he condi ions unde which one mechanism is mo e
bene icial han he o he .
The emainde o his pape p oceeds as ollows. Sec ion 2 in oduces ou ame-
wo k and elabo a es on he heo e ical backg ound. In Sec . 3, we desc ibe he s udy
selec ion p ocess (3.1) and p esen ou e iew (3.2). In Sec . 4, we discuss p ac ical
implica ions and di ec ions o u u e esea ch. Sec ion 5 p esen s ou conclusions.
2 Backg ound
2.1 Risk and isk- aking
Manage ial decisions a e associa ed wi h isk. Si kin and Pablo (1992, p. 10) de ine
isk “as he ex en o which he e is unce ain y abou whe he po en ially signi i-
1 3
2351
N. K eilkamp e al.
can and/o disappoin ing ou comes o decisions will be ealized.” Unce ain y is,
e.g., e lec ed by he a iabili y o po en ial ou comes o a decision (Libby and Fish-
bu n 1977). These ou comes do no necessa ily ha e o be nega i e bu may also be
posi i e. Howe e , hey mus ha e a su icien magni ude o ep esen a signi ican
isk o a decision-make . Based on his unde s anding, we de ine isk- aking as he
“deg ee o isk associa ed wi h he decisions made” (Si kin and Pablo 1992, p. 10).
Empi ical esea ch uses di e en ways o ope a ionalize isk and isk- aking. In
pa icula , h ee app oaches appea common: indi idual-based, i m-based, and ma -
ke -based app oaches. Indi idual-based measu es ypical o expe imen al s udies
use isk elici a ion ins umen s (e.g., K eilkamp e al. 2021). Pa icipan s’ esponses
a e in e p e ed as hei willingness o ake isks. A case in poin is he bomb isk
elici a ion ask (C ose o and Filippin 2013). Resea che s ha employ i m-based
app oaches examine o wha deg ee he i m’s decisions a e associa ed wi h isk.
Fo example, when a i m has mo e R&D in es men s (e.g., Sande s and Hamb ick
2007), engages less in hedging (e.g., Knop e al. 2002), o makes mo e acquisi-
ion in es men s (e.g., Hou e al. 2020), i m isk and hus execu i es’ willingness
o ake isks is judged o be highe . When ma ke -based app oaches a e employed
o ope a ionalize isk, ma ke measu es such as s ock e u n ola ili y a e used (e.g.,
Baixauli-Sole e al. 2015).
2.2 The heo e ical link be ween incen i es and isk- aking
Fi ms employ incen i es o add ess agency p oblems (Jensen and Meckling 1976) ha
a ise because p incipals (e.g., i m owne s) and agen s (e.g., execu i es) ha e di e g-
ing in e es s, and in o ma ion asymme y exis s (Baiman 1990). In o ma ion asym-
me y may a ise be o e o a e a con ac is signed. P oblems o ad e se selec ion
esul om p e-con ac ual in o ma ion asymme y, while mo al haza d is associa ed
wi h pos -con ac ual in o ma ion asymme y (e.g., Macho-S adle and Pé ez-Cas-
illo 2001). P io li e a u e ypically associa es manage ial isk- aking wi h mo al
haza d (e.g., Kadan and Swinkels 2008; Edmans and Liu 2011; Laux 2015). Mo al
haza d occu s i he p incipal canno obse e he agen ’s ac ions (“hidden ac ion”) o
i he agen ecei es p i a e in o ma ion a e he con ac is signed (“hidden in o -
ma ion”). I he agen ’s ac ions and he isk associa ed wi h hese ac ions a e no
obse able o i he agen ecei es p i a e in o ma ion abou he isk associa ed wi h
his ac ions, he agen may choose ac ions and isk le els ha a e no in he p incipal’s
in e es . The p incipal mus he e o e p o ide incen i es o s ee agen s’ beha io .
2.3 De e minan s o isk- aking
Theo e ical economic models iden i y di e ences in manage s’ le els o weal h,
deg ees o pe sonal di e si ica ion, hedging op ions, pe o mance goal a ainabili y,
deg ees o isk a e sion, and o he mode a o s o he e ec o compensa ion on isk-
aking (Smi h and S ulz 1985; Lambe e al. 1991; Ca pen e 2000; B isley 2006).
This e iew in ends o suppo and complemen his analysis by e iewing empi ical
esea ch.
1 3
2352

How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
To do so, i is impo an o unde s and he de e minan s o isk- aking. Si kin and
Pablo (1992) p opose a model ha desc ibes isk- aking as a unc ion o isk p open-
si y and isk pe cep ion. Risk p opensi y can be unde s ood as he endency o ake
o a oid isks and depends on isk p e e ences, ine ia, and he ou come his o y o
pas decisions. Risk pe cep ion desc ibes how isk is expe ienced in a speci ic si u-
a ion. Si kin and Pablo (1992) a gue ha isk pe cep ion is con ex -dependen and
based on ex e nal ac o s. One de e minan is an o ganiza ion’s con ol sys em (e.g.,
he incen i e sys em), which can s ee manage s’ a en ion. Consequen ly, i is alu-
able o unde s and how incen i e design choices in luence isk- aking h ough isk
pe cep ion.
Decision-making is o en d i en by men al sho cu s (Lu and Shields 2009).
Many i a ionali ies conce ning isk a e based on cumula i e p ospec heo y (CPT).
This heo y p edic s ha isk- aking beha io is e e ence-poin dependen and can
be explained by an S-shaped u ili y unc ion a ound he e e ence poin (Kahneman
and T e sky 1979; T e sky and Kahneman 1992). Acco ding o p ospec heo y,
indi iduals a e isk a e se in a gain domain, while hey seek isk in a loss domain.
Addi ionally, indi idual e e ence poin s may a y o e ime, e.g., he ela ionship
migh be in luenced by i ele an ex e nal ac o s o aming. Consequen ly, i ms
should be awa e o execu i es’ e e ence poin s and aming e ec s when designing
hei compensa ion. We e e o hese poin s in ou discussion in Sec . 4.
SP/A heo y ex ends he insigh s om p ospec heo y and ocuses on emo ional
desi es (Lopes 1987; Lopes and Oden 1999). In SP/A heo y, S s ands o secu i y,
P o po en ial, and A o aspi a ion. The no ion o secu i y e e s o he endency o
a oid low le els o weal h. Aspi a ion desc ibes he endency o aim o p ede ined
goals ( e e ence poin s), and po en ial ep esen s he desi e o each high le els o
weal h. Unlike CPT, SP/A heo y a gues ha manage s assess isky decisions di e -
en ly depending on whe he a secu i y o po en ial ocus is igge ed. The a en ion
ocus is dependen on he pe cei ed p obabili y o eaching he desi ed aspi a ion
le el. Manage s inc ease isk- aking ei he i a ce ain le el o compensa ion is pe -
cei ed as sa e and hey shi hei ocus o he upside po en ial o i isk- aking is he
only way o each he le el o aspi a ion. The e o e, manage s’ willingness o ake
isks depends on ac o s ha in luence compensa ion secu i y and aspi a ion (e.g.,
de ined by pe o mance a ge s).
Las , he beha io al agency model (BAM) combines economic heo y and sho -
comings in human decision-making o le e age insigh s om bo h ields (Gomez-
Mejia and Wiseman 1997; Wiseman and Gomez-Mejia 1998). The BAM d ops he
assump ion o consis en isk p e e ences, ad oca ing ha isk- aking depends on he
con ex o a decision. Speci ically, he model conside s ex e nal ac o s. Examples o
such ac o s a e he o m and in ensi y o supe ision, pe o mance his o y, compen-
sa ion mix, and beha io al e alua ion c i e ia, such as ac o s ha a ec isk- aking
h ough p oblem aming and isk-bea ing (pe cei ed weal h a isk).
2.4 Con igu a ion and design o execu i e incen i es
I is essen ial o sys ema ize pe o mance-con ingen compensa ion o deduce sug-
ges ions o incen i e design and comp ehend he link be ween compensa ion and
1 3
2353
N. K eilkamp e al.
isk- aking. In addi ion o in es iga ing how speci ic design ea u es a ec isk- aking
(Beck e al. 2020), we aim o elucida e ac o s a he pe sonal, i m, and en i onmen-
al le els ha mode a e his ela ionship. Figu e 1 p esen s a concep ual amewo k
o he e ec s o execu i e compensa ion on isk- aking. Based on his amewo k,
we de elop a s uc u e o he e iew in Sec . 3.2.
When compensa ion is linked o pe o mance, i ms ha e o de ine how pe o -
mance is measu ed, he shape o he compensa ion unc ion, and he ype o ewa ds
(Me chan and Van de S ede 2017). Wi h espec o he la e , i ms may use cash,
equi y-based, o deb -based compensa ion (Sunda am and Ye mack 2007; Me chan
and Van de S ede 2017). Cash is o en used as pa o sho - e m and long- e m
incen i e plans and paid i one o mo e pe o mance measu es a e me (Beck e al.
2020). Rewa ds a e equi y-based i compensa ion is ei he paid in s ock (op ions)
o depends on he s ock p ice. A popula o m is ( es ic ed) s ock. In his case, he
execu i e does no ha e o pay o he sha es bu is only allowed o sell hem a e
a ce ain pe iod o ime (Me chan and Van de S ede 2017). A a ian o es ic ed
s ock is phan om sha es ha do no ep esen ac ual sha es bu e lec hei alue.
Ano he o m o s ock-based compensa ion is s ock op ions. In his case, he execu-
i e is en i led o buy sha es o he i m a a p ede ined p ice a e a es ing pe iod
and be o e he op ion expi es. I he s ock p ice exceeds he s ike p ice, he execu i e
can sell he op ion o buy he sha es o ealize a gain. S ock op ions ewa d gains bu
do no penalize losses (Me chan and Van de S ede 2017). Ano he ewa d ype is
deb -based compensa ion, usually e e ed o as inside deb (Sunda am and Ye mack
2007). Inside deb , i.e., deb held by manage s, consis s o pensions and de e ed
compensa ion. I is a gued ha adding inside deb o execu i e compensa ion is ben-
e icial, as i di ec s execu i es no only o conside he incidence o insol ency bu
also he alue o asse s in his case.
Fig. 1 Concep ual F amewo k
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How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
The ype o ewa d a ec s he compensa ion unc ion, e.g., s ock op ions es ablish
con exi y, while deb compensa ion esul s in conca i y. A compensa ion unc ion
is con ex (conca e) i an execu i e ecei es a g ea e (smalle ) inc ease in compen-
sa ion when i m pe o mance mo es om medium o high le els han om low
o medium le els. We also e e o he ela i e sha e o ixed e sus pe o mance-
con ingen pay as con exi y because o i s simila i y o op ions payou s. Below, we
use he o m o he compensa ion unc ion ins ead o he ype o ewa d o s uc u e
ou e iew. This is also in line wi h empi ical esea ch in es iga ing he di ec e ec s
o he compensa ion unc ion on isk- aking. While a s uc u e based on pe o mance
a ge s and measu es would also be possible, we ollow Wiseman and Gomez-Mejia
(1998), a guing ha pe o mance a ge s and measu es only indi ec ly a ec isk-
aking by aming.2
Below, we di e en ia e be ween he compensa ion unc ion’s s eepness (3.2.1.)
and i s cu a u e (3.2.2). The s eepe he compensa ion unc ion is, he mo e i m
pe o mance a ec s execu i es’ weal h. Theo y sugges s ha cu a u e helps o man-
age isk- aking mo e p ecisely, i.e., i ms can es ablish conca i y and/o con exi y.
Compensa ion unc ions a e ypically con ex o some pe o mance le els and con-
ca e o o he s.
When we discuss he compensa ion unc ion below, we e iew he li e a u e
in es iga ing he e ec o compensa ion on execu i es’ absolu e weal h. Each sec ion
add esses ime aspec s by di e en ia ing be ween execu i es’ annual compensa ion
package (sho e m) s. execu i es’ o e all compensa ion (mid and long e m). CPT,
SP/A heo y, and he BAM sugges ha —beyond he e ec on absolu e weal h—
indi iduals’ pe cep ions ma e . In pa icula , execu i es e alua e hei compensa ion
ela i e o e e ence poin s and adjus hei isk- aking espec i ely (Thale e al.
1997; Wiseman and Gomez-Mejia 1998). These e e ence poin s (Sec . 3.2.3) can
ela e o indi idual o ex e nal ac o s.
3 Re iew
3.1 S udy selec ion p ocess
Fo he li e a u e e iew, we ollow he sugges ion o T an ield e al. (2003). The
de ailed e iew p ocess is depic ed in Fig. 2 (Fische 2007).
Fi s , we scan leading jou nals be ween 2013 and 2018 ha co e ele an esea ch
and selec all ele an s udies.3 These and u he s udies iden i ied h ough an addi-
2 Hence, we discuss s udies ha in es iga e pe o mance a ge s and pe o mance measu es in Sec . 3.2.1.
3 Leading jou nals ha co e esea ch analyzing he connec ion be ween execu i e compensa ion and
isk- aking include he Jou nal o Applied Psychology, Managemen Science, Academy o Managemen
Jou nal, Jou nal o Economic Beha io and O ganiza ion, Jou nal o Accoun ing and Economics, Jou -
nal o Accoun ing Resea ch, The Accoun ing Re iew, Con empo a y Accoun ing Resea ch, Accoun ing,
O ganiza ions and Socie y, The Jou nal o Finance, Jou nal o Financial Economics, Adminis a i e Sci-
ence Qua e ly, and Ame ican Economic Re iew.
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N. K eilkamp e al.
ional web sea ch a e used o de ine app op ia e sea ch e ms.4 These keywo ds a e
employed o pe o m a da abase and lib a y ca alog sea ch. We scan he s udies’ i les
and abs ac s o hese keywo ds o iden i y ele an s udies. Nex , he bibliog aphies
a e checked o ind addi ional s udies. We hen use scien i ic ci a ion indexing se -
ices o ind sou ces ha ci e al eady-iden i ied s udies.5
Finally, we analyze all s udies conce ning hei esea ch ques ion and selec only
hose empi ical s udies ha a e ele an .6 S udies wi hou a heo e ical ounda ion
a e no included. We ind a o al o 76 s udies. The majo i y o hese s udies we e
published in he las 15 yea s. Figu e 3 lis s he jou nals ha published he s udies
included in his e iew. We p esen and discuss he esul s o he li e a u e e iew in
he nex sec ion.
3.2 Empi ical indings
3.2.1 Compensa ion unc ion s eepness
The s eepness o a compensa ion unc ion desc ibes he ela ionship be ween execu-
i es’ weal h and u u e i m pe o mance. The s eepness can be di ec ly modi ied
by changing he slope o he compensa ion unc ion o indi ec ly, e.g., by o e ing
4 We employ he ollowing sea ch e ms o execu i e incen i es: bonus, compensa ion, con es , deb ,
equi y, incen i e, op ions, pensions, pe o mance-con ingen , pe o mance-based, e e ence poin , s ock,
ou namen , a iable pay. Ou sea ch e ms o isk include, e.g., i m isk, isk beha io , isk in es men ,
isk- aking.
5 These include he ollowing: The Web o Science, Google Schola , Science Di ec and EBSCO Disco -
e y Se ice.
6 We conside ed s udies ha a e published in jou nals classi ied as A+, A o B by he Ge man Academic
Associa ion o Business Resea ch (VHB) “JOURQUAL 3”.
Fig. 2 S udy Selec ion P ocess (c . Fische 2017)
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How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
deb compensa ion, i.e., CDS and pensions, is associa ed wi h lowe i m isk. No a-
bly, hese au ho s also conclude ha CEOs’ la ge deb holdings dec ease i m alue
and equi y p ices, indica ing nonop imal le els o isk- aking. Cassell e al. (2012)
ind a nega i e ela ionship be ween deb compensa ion and he ola ili y o s ock
e u ns, R&D expendi u es, and le e age. In he same ein, hese au ho s also ind
ha deb compensa ion is posi i ely associa ed wi h di e si ica ion and asse liquid-
i y. Fu he s udies p o ide simila indings by showing ha deb compensa ion is
associa ed wi h less isk (Milidonis e al. 2019), less isky i m policies (Dhole e al.
2016), and less ax shel e ing (Chi e al. 2017). Fo inancial ins i u ions, Benne e
al. (2015) ind ha la ge CEO inside deb holdings ( ela i e o equi y holdings) a e
associa ed wi h lowe isk- aking and lowe de aul isk du ing he inancial c isis.
They conclude ha inside deb explains be e pe o mance du ing he inancial c i-
sis. Analogously, Van Bekkum (2016) inds ha execu i es’ p ec isis deb holdings
a e ela ed o lowe s ock alue losses and a lowe p obabili y o dis ess du ing he
inancial c isis. Las , deb compensa ion is also ound o be ela ed o mo e conse a-
i e payou policies o banks (S i as a e al. 2014).
Some s udies also e eal i m and en i onmen al ac o s ha mode a e he e ec
o deb compensa ion on isk- aking. Conce ning compensa ion design, Anan ha a-
man e al. (2014) a gue ha i is no he magni ude o deb compensa ion alone ha
ma e s bu ha deb compensa ion needs o be “ uly deb -like”. This implies ha
execu i es’ deb asse s a e compa able o ex e nal deb -holde claims ega ding he
payou s uc u e (e.g., he ime ho izon) and senio i y. In line wi h his a gumen ,
Colonnello e al. (2017) ind ha inside deb only educes isk- aking i payou s a e
unsecu ed, as is he case o ex e nal lende s. Sause e al. (2015) u ilize he in oduc-
ion o new es ic ions (such as bonus caps, clawbacks, o bonus de e al) o CEO
compensa ion in he EU o in es iga e he join e ec o hese conca i y-inducing
ins umen s. These au ho s ind ha i ms ha align hei compensa ion o hese ules
mo e closely a e associa ed wi h lowe idiosync a ic and sys ema ic isk- aking and
e en wi h be e isk-adjus ed pe o mance. Fu he mo e, he isk-dec easing e ec
o clawbacks is s onge o smalle i ms and hose audi ed by Big 4 companies (Liu
e al. 2020).
In summa y, he empi ical li e a u e as ly suppo s he heo e ical a gumen ha
deb compensa ion dec eases i m isk- aking. F om an agency and p ospec heo y
pe spec i e, his is no su p ising. Assuming ha execu i es a e isk a e se, hey
demand a isk p emium o engage in isk- aking ha a ec s hei weal h. Conca i y,
in con as , p o ides a nega i e isk p emium by ans e ing downside isk o execu-
i es while no compensa ing o he upside po en ial. Howe e , he e ec o deb
compensa ion on i m alue seems less s aigh o wa d. Fo example, while Wei and
Ye mack (2011) ind deb compensa ion o be nega i ely associa ed wi h i m alue,
Benne e al. (2015) p opose deb compensa ion o be a p edic o o bank pe o -
mance du ing he inancial c isis. Such disco dance sugges s ha u he ac o s a e
essen ial o conside . As empi ical esea ch on mode a o s is s ill spa se, his e eals
a enues o u u e esea ch. This esea ch may also conside how beha io al implica-
ions based on he BAM a ec isk- aking. Figu e 6 summa izes he main indings
om his sec ion.
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N. K eilkamp e al.
3.2.3 Rela i i y o execu i e compensa ion
In addi ion o he isk- aking e ec s o execu i es’ absolu e weal h, beha io al heo-
ies such as he BAM highligh he impo ance o execu i es’ pe cep ion o hei
compensa ion ela i e o ce ain e e ence poin s (Hack and Von Biebe s ein 2015).
The e e ence poin s can be ei he in e nal (e.g., an execu i e’s compensa ion in he
p io yea o a sel -se a ge ) o ex e nal (compa ison o pee s o ou namen s). We
i s discuss in e nal e e ence poin s.
Based on he idea o in e nal e e ence poin s, La aza-Kin ana e al. (2007) dis-
en angle di e en o ms o isk-bea ing. They show ha a iabili y in compensa ion
is ela ed o mo e isk- aking, while he in insic alue o s ock op ions (wi h i s
inhe en downside isk) is associa ed wi h lowe isk- aking. Fu he mo e, incen i es
wo k di e en ly in a loss han in a gain con ex (Wiseman and Gomez-Mejia 1998).
De e s e al. 2008) ind ha CEOs inc ease s a egic isk- aking dependen on he
accumula ed alue o unexe cisable op ion holdings, while he ela ionship be ween
exe cisable op ions and s a egic isk- aking is cu ilinea . These indings highligh
execu i es’ ade-o be ween po en ial u u e gains and losses (Ma in e al. 2013).
Based on R&D expendi u es as a isk measu e, Lim (2015) inds ha nega i e de ia-
ions om a e e ence poin inc ease isk- aking, while posi i e de ia ions dec ease
isk- aking. Simila ly, a - he-money s ock op ions elici mo e isk- aking han in- he-
money s ock op ions, as he la e ep esen s a gain ame (Sawe s e al. 2011). Lim
2017) co obo a es his easoning by showing ha he isk-elici ing e ec o op ions
on CEO isk- aking depends on CEOs’ weal h in ela ion o hei e e ence poin s.
She u he inds ha in he con ex o a nega i e de ia ion om a e e ence poin
(loss con ex ), a highe likelihood o bank up cy os e s isk- aking. Fu he mo e,
Fig. 6 The e ec o compensa ion unc ion conca i y on isk- aking
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How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
slack esou ces induce isk- aking in a gain con ex , i.e., a posi i e de ia ion om a
e e ence poin .
Sp inkle and Williamson (2008) a i e a simila esul s in a di e en se ing.
These au ho s ind a U-shaped unc ion be ween budge le els and isk- aking; pa -
icula ly, low budge goals, as well as s e ch budge goals, elici isk- aking. Linked
o he esul s o Lim (2017), low budge goals a e easy o achie e (gain con ex ) and
c ea e slack esou ces, while s e ch budge goals a e ba ely achie able (loss con-
ex ) and con ey he possibili y o ecei ing no hing. This analogy highligh s i ms’
oppo uni ies o manage isk- aking beyond de e mining execu i es’ compensa ion
unc ion. O he han a ge se ing, i ms ha e u he op ions o in luence how execu-
i es pe cei e hei compensa ion, such as aming a iabili y as a bonus o penal y.
In his ega d, Oblak e al. (2017) ind ha aming a con ac as a penal y induces
mo e isk- aking han aming as a bonus. Zolo oy e al. (2019) ex end his easoning
by showing ha a posi i e a ec i e s a e in ensi ies his ela ionship.
As a esul , while he e is oom o mo e esea ch conce ning in e nal e e ence
poin s, he empi ical esul s sugges ha neglec ing execu i es’ pe cep ions o hei
compensa ion may lead o inaccu a e isk managemen . Fu he mo e, esea ch also
shows ha compensa ion design impac s isk- aking h ough indi iduals’ pe cep ion
o hei compensa ion ( unc ion). B inging pe sonal pe cep ions o he able may also
shed addi ional ligh on some o he ambiguous indings o he e ec o s eepness
on isk- aking.
In addi ion o e e ence poin s ha ela e o pe sonal aspec s, he ex e nal con ex
c ea es he oppo uni y o compa e weal h and compensa ion o pee s. Lim (2018)
e e s o such compa isons as social e e ence poin s. As execu i es ha e he oppo -
uni y o change employe s, compa isons can c ea e implici ou namen compensa-
ion. No ably, we e e o an implici ou namen as a sys em ha is no delibe a ely
designed as a ou namen bu whe e an indi idual’s compensa ion ela i e o pee s
c ea es a ou namen -like si ua ion. In con as , an explici ou namen is an incen-
i e sys em whe e a i m p o ides a bonus pool and di ides his pool based on pa -
icipan s’ pe o mance. In he ollowing, we i s p esen esul s conce ning implici
ou namen s be o e we ocus on explici ou namen s. While explici ou namen s
a e no a egula o m o execu i e compensa ion, e idence based on explici ou na-
men s may e eal implica ions ha also apply o implici ou namen s.
The empi ical li e a u e gene ally ag ees on a isk-inducing e ec o ou namen
compensa ion, which is in line wi h he p edic ions o heo e ical models (H ide
2002). Conce ning implici ou namen s, Coles e al. (2018) ind ha a la ge pay
gap be ween a CEO and he highes -paid CEO in he same indus y is associa ed
wi h highe isk- aking and ha his e ec is s onge when CEO mobili y inc eases.
Based on he pay gap be ween execu i es and highe -paid execu i es in he same
a ea, Ma e al. (2020) p o ide simila e idence o local ou namen s. These au ho s
ind ha la ge pay gaps be ween local pee s a e ela ed o highe CEO and CFO
isk- aking.
Simila mechanisms occu wi hin a i m. Implici ou namen s ha esul om pay
gaps and p omo ion incen i es wi hin a i m also a ec isk- aking. Using an a chi al
s udy, Kini and Williams (2012) in es iga e he pay gap be ween senio manage s
and he i m’s CEO as a na u al p omo ion ou namen and show ha la ge p ice
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N. K eilkamp e al.
sp eads a e associa ed wi h highe isk- aking. Hence, la ge pay gaps be ween op
execu i es inc ease i m isk, as senio manage s ollow iskie policies. Pa el e al.
(2018) a i e a a simila conclusion by inding ha highe pay dispe sion in op
managemen eams is associa ed wi h highe isk- aking. This e ec is e en s onge
wi h a his o y o unde pe o mance o o e y opaque i ms (Jia 2018). Howe e ,
Say e e al. (1998) sugges ha manage s an icipa e he s a egic oppo uni ies o job
p omo ions based on an expe imen al s udy. They show ha ou namen con es an s
ecognize he s a egic implica ions and consequences o a p omo ion ou namen
and espond oppo unis ically.
Conce ning explici ou namen s, E iksen and K aløy (2014) expe imen ally
show ha he nega i e e ec o myopic loss a e sion (i.e., isk a e sion ha is ueled
by equen e alua ions o in es men s) can be c owded ou by a ou namen . In line
wi h he isk-inducing e ec o ou namen s, his s udy sugges s ha equen assess-
men o an in es men enhances isk- aking unde a ou namen incen i e sys em.
Hence, ou namen s can se e as a measu e o p omo e isk- aking among isk-a e se
employees. Gaba and Kal a (1999) expe imen ally show ha , in he case o a low p o-
po ion o ou namen winne s, indi iduals end o choose mo e isky s a egies when
deciding on a sales dis ibu ion plan. This inding is con i med by Schedlinsky e al.
(2016), who show ha a low p opo ion o ou namen winne s elici s excessi e isk-
aking. Addi ionally, in es iga ing excessi e isk- aking, E iksen and K aløy (2016)
ind ha di e ences a ise om compe i i eness wi hin ou namen s. Mo e p ecisely,
in a ou namen whe e he dominan s a egy is o ake no isk, hese au ho s ind ha
indi iduals ake mo e excessi e isks when he numbe o ou namen con es an s
inc eases o when he winne is made public.
In addi ion o ac o s conce ning ou namen design, o he ac o s indi ec ly
d i e isk- aking. I in e media e ela i e pe o mance eedback is p o ided du ing
he ou namen , an impo an ac o o isk- aking is an indi idual’s cu en ank.
Nieken and Sliwka (2010) show ha he cu en ou namen ank in luences isk-
aking. They ind o a wo-pe son ou namen ha he la ge he co ela ion be ween
he pa icipan s’ isky ou comes, he mo e (less) likely i is ha he leading ( ailing)
pe son chooses a isky s a egy. In es iga ing a g ea e numbe o ou namen pa -
icipan s, Bo hne e al. (2007) show di e ences in he po en ial di ec ions o anking
shi s. Using NASCAR ace da a, hey ind ha acing he h ea o alling behind
elici s highe isk- aking han acing he oppo uni y o climb up in anking posi-
ions. Addi ionally, he au ho s documen ha he mo e es ablished he anking is,
i.e., he mo e pa icipan s ha e acknowledged hei anking posi ion, he mo e isk
pa icipan s accep o main ain hei cu en ank. Ki chle e al. (2018) co obo a e
his easoning by inding ha unde pe o me s in ou namen s ake mo e isks han
o e pe o me s. Fu he mo e, Schedlinsky e al. (2016) iden i y simpli ied decision
ules, i.e., basing decisions on expec ed alues ins ead o sys ema ic op imiza ion, as
a d i e o excessi e isk- aking in ou namen s.
In summa y, he empi ical li e a u e on he isk-inducing e ec s o ou namen s
highligh s he necessi y o conside ing explici and implici ou namen s in execu-
i e compensa ion. When designing execu i es’ compensa ion, i ms mus no see
he espec i e execu i e in isola ion bu ela i e o pee s inside and ou side he i m.
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4 Discussion
Ou e iew e eals impo an insigh s o p ac i ione s and ui ul a enues o u u e
esea ch. F om a p ac i ione ’s pe spec i e, ou e iew may se e as a amewo k o
use execu i e compensa ion as a co e ins umen o suppo a i m’s s a egy (“pay
ollows s a egy”). Fo example, i ms in apidly g owing ma ke s ha pu sue a
s a egy o s eep g ow h (e.g., ech s a -ups) equi e hei execu i es o ake signi i-
can ly mo e isks han mo e ma u e i ms. Ou amewo k sugges s ha such i ms
may wan o es ablish con ex compensa ion unc ions (i.e., use s ock op ions) while
e aining om conca e compensa ion unc ions (i.e., pensions). The Second Sha e-
holde s’ Righ s Di ec i e (ARUG II) equi es all publicly lis ed i ms in Ge many
o ha e hei sha eholde s o e on he execu i e compensa ion sys em. Ou e iew
p o ides a guideline o e alua ing he compensa ion sys em agains he s a egy and
highligh s po en ial mode a o s (e.g., le e age).
Supe iso y boa ds o o he s in cha ge o designing compensa ion packages should
be awa e o he beha io al e ec s ou lined in his e iew. Fo example, when a i m
mo es om a g ow h o a ma u e phase o he i m li e cycle o ice e sa, he incen-
i e scheme should e lec a change in he i m’s isk s a egy. Howe e , beha io al
heo y and empi ical e idence sugges a s ickiness e ec (B ink e al. 2017, p. 15):
“Changing om he low powe o he high powe incen i e signi ican ly inc eases
excessi e isk aking, bu changing om he high powe o he low powe incen i e
does no signi ican ly dec ease excessi e isk aking.” Compensa ion design should
he e o e ake such beha io al e ec s in o accoun , e.g., by using a conca e compen-
sa ion unc ion when mo ing om high o low powe incen i es.
Ano he example o how i ms can use his e iew ela es o e e ence poin s.
As ou lined ea lie , execu i es conside mul iple e e ence poin s, including in e -
nal (e.g., he cu en op ion alue) and ex e nal e e ence poin s (e.g., pee com-
pensa ion). Again, he s udies and beha io al heo y p esen ed be o e show how
e e ence poin s a ec isk- aking (e.g., when an execu i e alls behind in compensa-
ion). In e es ingly, i ms can di ec execu i es’ a en ion o ce ain e e ence poin s,
he eby indi ec ly s ee ing hei isk- aking. Fo example, Volkswagen’s supe iso y
boa d explici ly s a es ha he compensa ion o boa d membe s o speci ic pee i ms
such as BMW, Tesla, SAP, o Hi achi should be conside ed when designing execu i e
compensa ion a Volkswagen (Volkswagen 2020).
F om a heo e ical pe spec i e, ou e iew may help iden i y esea ch oppo uni-
ies. Fo example, s udies ha asse how he s eepness o he compensa ion unc ion
a ec s isk- aking a i e a ambiguous esul s. The e o e, u u e s udies may wan
o shed mo e ligh on mode a o s, including beha io al aspec s such as indi idual
pe cep ions.
F om a isk-managemen pe spec i e, u he in es iga ion o compensa ion unc-
ion aspec s ha in end o shi isk- aking in speci ic di ec ions seems pa icula ly
p omising. In he 1990s, in an a emp o mo i a e execu i es o ake mo e isks,
i ms s a ed employing ins umen s ha esul ed in con ex compensa ion unc ions.
Since hen, a conside able body o esea ch has p o ided e idence o he posi i e
associa ion be ween con exi y and isk- aking and e ealed impo an mode a o s a
he indi idual, i m, and en i onmen al le els. As a eac ion o excessi e isk- aking
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N. K eilkamp e al.
igge ed by la ge op ion po olios, i ms s a ed g an ing deb -based compensa-
ion (in addi ion o equi y) o add conca i y o execu i es’ compensa ion unc ions.
Beginning in he mid-2000s, deb compensa ion is a ela i ely young esea ch ield.
Hence, many mode a o s s ill need o be in es iga ed. While mos esea ch co obo-
a es he isk-dec easing e ec s o deb -based compensa ion, i emains unclea o
wha ypes o execu i es, o which i ms, and a wha magni ude deb compensa ion
migh back i e.
Impo an ly, execu i e compensa ion usually consis s o a mix u e o ins umen s
ha c ea e each o he p e iously discussed shapes—i.e., s eepness, con exi y, and
conca i y— o a ce ain ex en . No ably, while some ins umen s such as op ions na -
u ally a ec s eepness and con exi y, i ms ace he challenge o balancing he use
o isk-inducing and isk-dec easing ins umen s o mo i a e execu i es o en ep e-
neu ially exploi business oppo uni ies on he one hand and e ain om excessi e
isk- aking on he o he hand. Hence, while he e is some esea ch on in e ac ions
be ween di e en ypes o ewa ds (De e s e al. 2008), he need o u he in es-
iga e he combined e ec s o di e en ins umen s (including mode a o s) is one
o he mos impo an conclusions o be d awn om his e iew. This includes he
de elopmen o new ins umen s and he adap a ion o es ablished ins umen s o
align i ms’ and execu i es’ in e es s and isk p e e ences.
Explo ing in e ac ion e ec s may also equi e o he measu emen app oaches.
In his ein, Ande son and Co e (2018) sugges a new sensi i i y measu e. These
au ho s p opose a measu e ha cap u es he sensi i i y o execu i es’ deb , s ock, and
op ions holdings o i m ola ili y and ind ha hei measu e explains isk- aking
be e han ega o o he ela i e measu es used in p io esea ch. Using his measu e
in u u e esea ch may be help ul in in es iga ing he join e ec s o ins umen s ha
es ablish s eepness, con exi y, and conca i y. Conce ning speci ic ins umen s, i ms
inc easingly employ pe o mance es ing ins ead o ime es ing (Be is e al. 2018).
Fu u e esea ch may wan o empi ically in es iga e how pe o mance es ing a ec s
execu i e isk- aking and how his ins umen in e ac s wi h o he mechanisms such
as deb compensa ion. In his ega d, i also seems in e es ing o iden i y he pe o -
mance measu es ha bes i i ms’ in en ions.
Ano he impo an ac o is ime. Fu u e esea ch should elabo a e mo e on he
ype o ewa d used o di ec isk- aking, pa icula ly by di e en ia ing be ween
sho - e m (ope a ional) isk- aking and long- e m (s a egic) isk- aking. Fo exam-
ple, o mo i a e isk- aking, a i m can inc ease he sha e o pe o mance-con ingen
(cash) pay ela i e o ixed compensa ion o g an mo e s ock op ions. The o me
may pa icula ly induce sho - e m isk- aking, while op ions elici a longe - e m
ocus, pa icula ly i associa ed wi h long es ing pe iods. Analogously, while com-
pensa ion caps and deb bo h es ic excessi e isk- aking, he ci cums ances unde
which each ins umen is mo e e ec i e a e unknown. As isk- aking does no simply
add up, i is also c ucial o u he s udy such di e ences in he scope o isk- aking
and hei join e ec s o assess he o e all e ec s on i m isk and i m pe o mance
(A el e al. 2018).
Las , one explana ion o he ambiguous esul s o s eepness may be an insu -
icien conside a ion o execu i es’ pe cep ions and in e nal e e ence poin s. The e-
o e, in addi ion o a chi al s udies ha ep esen he co e pa o s udies in his
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How execu i e incen i e design a ec s isk- aking: a li e a u e e iew
e iew, u u e esea ch should employ mo e su ey esea ch, lab expe imen s, and
mixed-me hod app oaches o expand ou unde s anding o cogni i e esponses o
isk- aking incen i es. Mo eo e , as i ms usually ie compensa ion packages o op-
managemen execu i es e y closely o he espec i e pe son, addi ional esea ch ha
in es iga es he ole o indi idual cha ac e is ics such as pe sonal isk p e e ences,
pas expe iences, o gende seems help ul (Cha ness and Gneezy 2012; Baixauli-
Sole e al. 2017). While p e ious esea ch sugges s ha ex e nal e e ences ma -
e h ough implici ou namen s, u u e esea ch should y o be e unde s and he
in e ela ions be ween execu i es’ compensa ion unc ion and implici ou namen s.
Fo example, i is unclea whe he p o iding deb compensa ion may be easible in
educing excessi e isk elici ed by implici ou namen s.
5 Conclusion
Pe o mance-con ingen ewa ds a e an e ec i e measu e o align execu i es’ in e -
es s wi h hose o he i m. We e iew esea ch on he e ec s o execu i e incen-
i es on isk- aking. In gene al, ou e iew sugges s ha i ms ha aim o manage
isk- aking ia compensa ion should no jus p o ide s ock op ions, as hei e ec on
isk- aking is ambiguous. Ra he , con exi y (conca i y) in hei execu i es’ compen-
sa ion unc ion inc eases (dec eases) isk- aking. Impo an ly, esea ch has iden i ied
a ious mode a o s ha i ms should conside when designing hei execu i e com-
pensa ion. To a oid ex eme isk beha io , i ms should implemen bo h con exi y
and conca i y o a ce ain ex en in execu i es’ compensa ion unc ions. The op imal
mix u e o di e en ins umen s o design execu i es’ compensa ion is whe e we see
he g ea es po en ial o u u e esea ch.
Finally, e en hough ou e iew ocuses solely on isk- aking, he e ec s on e o
should no be igno ed. Thus, i ms should always choose hei compensa ion sys ems
based on he a ailable indings as o how he incen i e sys em a ec s isk- aking and
e o .
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