Variable pay as a risky choice: Determinants of the relative attractiveness of incentive plans

This paper presents an experimental investigation of risk preferences in the context of compensation. In five studies, participants indicated their preference between a job offering a fixed salary and one having a lower certain component but the potential to earn a higher amount contingent on performance. Results demonstrate that people are not generally risk averse in this context, as found in earlier research, but rather that risk preferences depend on the nature of the variable pay plan. In particular, in both between- and within-subjects designs, variable pay was preferred more often when incentives were based on individual rather than collective (team or organizational) performance, and participants were more optimistic about the likelihood of receiving incentives as individuals. The effects of individual differences such as self-efficacy and preference for group work were contingent on the format of the variable pay plan. Implications for designing compensation plans and employee recruitment and retention are discussed.

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