Journal of Risk

Risk.net

Does bonus deferral reduce risk-taking?

Dietmar Leisen

  • 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

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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