Incentives and culture in risk compliance in the financial Industry

This experimental study investigated the effects of remuneration and workplace environment on risk compliance. The study involves 269 financial professionals and was designed to mimic investment decisions taken by financial services executives (e.g.,granting loans and buying securities).Participants in a simulated work environment were asked to make profitable investments,provided that these investments complied with the relevant risk policy. Two different framing treatments (relating to the behaviour of the manager and co-workers) were used to reflect either a profit-focused or risk-focused work environment. Two payment treatments were utilised: variable (linked to expected profits) and fixed payment. It was found that variable remuneration reduces compliance with risk policy. Risk culture (measured using participants'perceptions of compliance) was found to mediate this relationship. This study demonstrated that both remuneration policy and the behaviour of managers and peers are determinants of risk culture.