Risk-taking in new project selection: Additive effects of bonus incentives and past performance history

The goal of this study is to investigate how past project performance history and bonus incentive pay schemes affect managers' propensity to select more or less risky projects. Performance history is manipulated via past positive outcomes (i.e. beating a target profit rate) and negative outcomes (i.e. missing a target profit rate). Two types of bonus incentive pay schemes (hurdle bonus and graduated bonus) were employed in the study. The findings are consistent with prospect theory that predicts that prior bad outcomes (negative performance history) motivate greater risk-taking than prior good outcomes (positive performance history). In addition, we find evidence that hurdle and graduated bonus incentive schemes also affect risk taking. Overall, we find an additive effect of these two factors, such that the greatest (least) risk taking occurred when participants had negative (positive) prior experience coupled with a graduated (hurdle) bonus scheme.