An Empirical Analysis of Risk Preferences, Compensation Risk, and Employee Outcomes

We use the NBER Shared Capitalism Database comprised of more than 40,000 employee surveys from 14 firms to explore whether a close match between workers’ risk preferences and the riskiness of their compensation packages relates to improved employee outcomes including lower absenteeism, lower shirking, lower probability of voluntary turnover, greater worker motivation, and higher levels of job satisfaction and loyalty. To do this, we use survey questions reflecting workers’ risk aversion parameters, coupled with a series of measures of the riskiness of workers’ compensation packages including the proportion of pay comprised of various forms of shared capitalism such as profit and gain sharing, ownership of company stock, and bonus arrangements. The primary finding of our paper is that a match between the workers’ risk preferences and the extent of risk in their compensation increases workers’ motivation, job satisfaction, company attachment, and loyalty, but risk-averse workers are generally less responsive to a preference-compensation match than risk-loving workers. JEL Categories: