Many elements of corporate executive pay programs believed to cause excessive risk taking actually encourage executives to reduce risk, according to Watson Wyatt.

“Many believe that executive pay played a substantial role in the financial crisis by encouraging excessive risk taking. As a result, public support has swelled for reforming and regulating the basic executive pay model,” says Watson Wyatt consultant Ira Kay. Watson Wyatt evaluated the executive compensation architecture at more than 1,000 firms and identified elements of executive pay programs that encourage or discourage corporate risk taking, and found that some widely held beliefs were contradicted, including the common critique that high incentive levels encourage reckless risk taking.

High levels of stock ownership were associated with reduced risk, and excessively high levels of pay opportunity encourage taking more risk, Watson Wyatt says. Besides “excessive” pay opportunity, other “risk aggravators” were found to be use of “a number of performance metrics in annual incentive (bonus) plans,” and use of “return-based metrics in annual incentive plans.” Among the “risk mitigators” was use of market-based metrics in annual incentive plans, Watson Wyatt reports.