UA Researchers Link Compensation, Risk

Researchers at the University of Arkansas’ Walton College of Business have discovered that executives whose salaries don’t depend on bonuses to maintain their standard of living are more likely to make risky decisions.r

“If your base salary is high, you are more willing to go for the kill and take risks, even if they might backfire because your personal standard of living is not affected,” said Vikas Anand, an assistant professor in the Walton College who worked on the study. r

The study also found that risk factor determined the information sources executives use.r

“For example, when base pay is low, executives bear tremendous risk because of their reliance on short-term variable pay, such as bonus, to maintain their lifestyles,” Anand said.r

In that case, the executives will make more decisions based on market sources such as customers and vendors and will be less likely to consult network sources, such as consultants and colleagues in other organizations, and secondary sources, such as publications and the Internet.r

Executives at high-tech companies with low base pay and high short-term incentives were more likely to use market sources to mitigate their risks, Anand said. High-tech execs needed to rely on as many sources as possible because that type of information becomes obsolete more quickly.r

Luis Gomez-Mejia, professor of management at Arizona State University, and Paul Tiedet, a former Walton College graduate student, worked with Anand on the study, which polled 207 executives in software manufacturing firms and 247 executives in non-high tech firms. r