1. What questions/issues is the author trying to address? How important are they? Why?

What influences managerial risk taking is the primary question that authors Martin Larraza-
Kintana, Luis R. Gomez-Mejia and Robert M. Wiseman are trying to address. In this paper, the
authors seek to analyze how compensation framing influences the risk-taking behavior of the
firm’s chief executive officer (CEO), and the mediating role played by risk bearing.

Building on agency and prospect theory views, authors construct, in this article, a behavioral
agency model of executive risk taking. In the model they combine elements of internal corporate
governance with problem framing to explain executive risk-taking behavior. The model suggests
that executive risk taking varies across and within different forms of monitoring and that agents
may exhibit risk-seeking as well as risk-averse behaviors. Authors develop specific propositions
that combine monitoring with performance and the framing of strategic problems to explain
executive choices of strategic risk. The resulting propositions enhance and extend the agency-
based corporate governance literature on executive risk taking.

Employing survey and archival data from a sample of IPO firms, and extending the ideas of the
Behavioral Agency Model (BAM), this study examines the influence of various forms of risk
bearing created within the compensation contract on perceived risk taking. The results show that
employment risk and variability in compensation each corresponds to greater risk taking, while
downside risk and the intrinsic value of stock options correspond to lower risk taking. Among the
implications from these results are the importance CEOs attach to relatively stable forms of pay,
and to drawing distinctions between the potential for loss of pay and uncertainty about the
amount of future pay.

These issues are important in order to identify when authors take different approaches. The
authors identify factors that may increase or decrease their risk-taking propensity based on
different internal and external factors. It is necessary, as the paper justifies the level of
performance that CEOs will display given the circumstances they are faced with. Hence, firms can
employ this mechanism to get the best out of their CEOs and deliver maximum results.
 2. What basic assumptions/arguments does the author make? What facts/opinions does
he present?
How valid are these assumptions/arguments/facts/opinions in the light of theoretical
development in the thematic field?

In order to identify the factors that influences managerial risk taking, the authors build on the
“Prospect Theory” that risk-taking behavior is influenced by framing, where framing represents
the individual’s perception, in terms of gains and losses, of a given situation or problem. The
authors then argue that in terms of compensation framing, reference point is essential to be
determined that is a key to construct CEOs ability to risk-taking and suggests two different
reference points:

a. The performance targets included in the compensation contract

When describing the performance targets, the authors adopt the BAM assumptions that CEOs
are ‘loss averse’ in their preferences. It is predicted that CEOs may accept more risk when faced
with the possibility of losing wealth however, will act more conservatively when faced with
situations promising increases in wealth. Thus, when the CEOs face risk of losing their already
obtained wealth, like their base salary, they become more likely to negate all the risk factors
that will affect their wealth. On the contrary, when faced with the likelihood of losing wealth,
they would act to prevent the loss even if it means higher risk taking.

Authors suggest that performance targets set by their firm are a primary reference used by the
CEOs, in framing strategic choice situations. If they feel that the performance targets are being
achieved, then they would perceive a gain context (positive framing) and loss context (negative
framing) if targets aren’t being met. Thus, authors assume that CEOs take more risk when their
targets are not being achieved and vice versa.

Another major factor that affects the risk-taking propensity of the CEOs is their peers’
compensation. They consider the Equity Theory’s suggestion that CEOs would behavior is
significantly affected by their difference in compensation that with respect to a set of
individuals that perform similar tasks in organizations of similar characteristics. Hence, it acts as
another reference point.

The CEOs would perceive a gain context (positive framing) whenever their compensation is
above of their peers hence, they would follow a more conservative approach towards risk-
taking, whereas, he/she would have high risk-taking strategies being implemented if the
compensation is found to be below of what their peers are getting.
4, What conclusions does the author draw? Are these conclusions justified in the light of the
empirical/theoretical evidence by the author? How important are these conclusions?

The entire study revolves around framing of compensation induced in the CEO relative to what
their peers are earning and the performance targets that the firms expects from them. On the
basis of these two important factors, CEOs would choose their strategies of taking high or low
risk. While compensation framing relative to the performance targets included in the
compensation contracts affects risk taking, there seems be be no effect from peers
compensation in respect to theirs.

This theory suggests that the way an individual performs is directly related to the rewards
he/she receives and the value attached to those rewards.If the firm wants to make any changes
in the risk taking nature of the CEOs then they can alter the performance targets. However,
there will have no effect of the compensation adjustmenton the risk taking behavior as shown
by the analyses of the study.

The results found by the study also