Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Does bonus deferral reduce risk-taking?
Dietmar Leisen
Need to know
- Deferring bonus payments typically decreases future risk aversion.
- It also increases future risk taking.
- Deferral ratio shall not exceed ratio of deferral-shortfall to pay-performance sensitivity.
Abstract
ABSTRACT
We characterize continuous-time risk-taking and show that the introduction of deferral increases risk-taking at any time when the realized asset value is large or small. For those realized asset values in between, we derive the parameterizations of deferral for which risk-taking decreases, and discuss trade-offs in setting the deferral parameters.
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