Effect of Risk on the Use of Performance‐Contingent Compensation Available to Purchase

The separation of ownership from control in large public corporations and the resulting conflict of interest between shareholders and managers is a fundamental problem in corporate governance. From the shareholders' perspective, an effective compensation contract is one that aligns the manager's incentives with shareholder interests. Numerous studies have investigated the use of performance‐contingent compensation to achieve this linkage, as well as the use of alternative control mechanisms. This study extends this research by examining the effect of risk on the use of performance‐contingent compensation. The effect of risk on compensation contracts is of interest to accountants because of accounting's stewardship role in the organization. In particular, because significant accounting resources are directed toward corporate control, it is of interest to accountants to know when firms are likely to place more or less emphasis on performance‐contingent compensation.