The application of the classical "linear" model of incentive pay to the case when the noise is multiplicative to effort generates two predictions for a given strength of incentives: 1) more risk-averse workers will put in less effort, and 2) setting a performance target will weaken the negative risk aversion--effort link. The data from a real-effort laboratory experiment involving 85 student participants support both these predictions. Implications of the model and empirical findings to the literature on, and practice of, personnel management are discussed.

incentive pay, performance targets, risk aversion
Laboratory, Individual Behavior (jel C91), Compensation Packages; Payment Methods (jel J33), Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues) (jel M52)
Erasmus Research Institute of Management
ERIM Report Series Research in Management
Erasmus Research Institute of Management

Zubanov, N.V. (2012). Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence (No. ERS-2012-005-STR). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from