The golden mean: the risk mitigating effect of combining tournament rewards with high-powered incentives

The rewards received by financial managers depend on both relative performance - e.g., fund infows based on league table rankings, executive promotions based on peer comparisons - and absolute performance - e.g., bonus payments for meeting accounting targets, hedge-fund incentive fees. It is well known that both relative and absolute performance rewards engender risk taking. In this paper, we show that these two sources of risk taking, relative and absolute performance rewards, mollify the risk-taking incentives produced by the other: absolute performance rewards mitigate rank-motivated risk taking. Rank rewards mitigate risk taking motivated by absolute performance rewards