An Empirical Analysis of Risk, Incentives and the Delegation of Worker Authority
Traditionally, researchers have had difficulty testing the relationship between the degree of risk or uncertainty in workers’ environments and incentive pay. The authors employ Prendergast’s (2002) theory that incorporates the delegation of worker authority into the principal-agent model to explain the lack of consistent empirical support for a trade-off between risk and incentives. Using data from the 1998 Workplace Employment Relations Survey (WERS) representing a cross-section of British establishments, the authors provide empirical evidence that clarifies this relationship. Specifically, they extend the standard principal-agent model and find evidence that managers cope with workplace risk by bundling incentive pay with the delegation of worker decision rights.