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Executive salary cap can have negative consequences

M.Limiting manager salaries could have undesirable consequences. This is suggested by an experimental study by researchers from the Universities of Giessen and Bayreuth. In their experiment, an upper limit for earnings not only prevented the subjects from taking too great risks. It also resulted in moderate risks being avoided even if it would have made business sense to get involved with them.

The researchers recruited a good 400 participants for their experiment. They had to make a risky decision; the more they dared, the higher their potential reward. The reward was capped for one half of the test persons, but not for the other half. Basically, the cap reduced the willingness to take risks.

Willingness to take risks decreases

However, even those test persons who were not affected by the upper limit became more cautious because they did not take any high risks. The willingness of these people to take risks decreases even further when they have to justify their decision – which many companies now actually ask of their employees.

The economics professor Arnt Wöhrmann from Giessen concludes from this that salary caps could be counterproductive: Managers who are already less willing to take risks might be deterred from making economically necessary decisions.

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