The Impact of Compensation Schemes on Risk Attitude: A Comparison between Bangladesh and US Decision-makers

Abstract

In Shis study we have examined the impact of the tie between compensation schemes and performance on the degree of risk taken by corporate decisionmakers. We have explored for the degree of tie, at which, decision-makers are inclined to embark upon riskier and more promising ventures but without being motivated to take an excessive amount of risk. We have further compared this subject matter between decision-makers from the two different environments of Bangladesh and the US. We have found that this risk behavior is different in the two dissimilar environments. In Bangladesh, the stronger the tie between the decision-makers ’ compensation schemes and their performances - the greater is their inclination to prefer riskier projects. In contrast, in the US there seems to be an optimal degree of tie between the two, somewhere in the middle. Beneath and beyond this mid-level of tie - US decision-makers are less motivated to take the riskier projects. Risk is an integral part of any business and it can act as an important deterrent or motivation for economic development. Stimulating business development requires therefore, to a great extent, willingness for risk taking by the decision-makers. However, at the same time, decision-makers have to be careful not to assume an excessive amount of risk. Overly generous compensation packages with targe-sized stock option grants may have created incentives for managers to assume excessive amount of risk, contributing to the US corporate scandals of the post-dotcom era and the current global financial crisis. The implication from this study is the recommendation to tie only partially Bangladesh executives’ compensation schemes to their performances. It might enhance the country's economic development by encouraging decision-makers to take upon themselves risk, but up to a certain point, and io avoid assuming excessive amount of risk.