The gift that keeps on giving: corporate giving and excessive risk-taking

Employees’ excessive risk-taking, defined as the risk associated with business decisions exceeding levels in firm owners’ interests (Brink et al. 2017; Eriksen and Kvaløy 2017), can jeopardize firm sustainability. Exchanging a lower expected value for a greater variance puts a strain on the firm’s risk-bearing ability. Although there is always the chance of a big payoff, excessive risk-taking behavior also has a high potential for consequential loss and, on average, reduces wealth (speculative dealings with an expected value < 1; Lefebvre and Vieider 2013). Not only does excessive risk-taking run counter to a for-profit firm’s value-maximizing objectives, but it may also harm society at large. In particular, financial sector professionals have been accused of taking excessive risks on behalf of others (Andersson et al. 2016; Cohn et al. 2017). Tournaments, stock option plans, and other asymmetric rewards have been blamed for stimulating excessive risk-taking beyond the banking sector (Eriksen and Kvaløy 2017; Sanders and Hambrick 2007). Due to relatively high amounts of contingent pay (i.e., structural differences in their payoff functions), equity investors often have incentives to take excessive risks to increase their profits at the expense of debt holders and other stakeholders (e.g., through overinvestment). While these excessive risk-taking incentives have received extensive attention in regulatory reforms for executive compensation,⁶ they do not reflect the widespread use of non-executive risk-taking incentives in practice (Murphy 2013). More than half of U.S. corporations employ some tournament schemes, where all types of employees—ranging from production-line workers to salespersons to mutual fund managers—compete for promotions, bonuses, or prizes (e.g., “employee of the year” awards) (Backes-Gellner and Pull 2013). A malfunctioning reward system may create unsustainable norms, self-regarding beliefs, and maladaptive paradigms that encourage employees at all levels to make “high-variance” rather than “good” investments (Cohn et al. 2017; Conyon et al. 2011). This study incorporates other stakeholders into employees’ daily investment decisions and links risk-taking and responsibility for others to inhibit excessive employee risk-taking.

An employee’s risk-taking choices affect others (Trautmann and Vieider 2012), including the firm’s stakeholders (e.g., firm owners, customers, and employees). For socially responsible firms, they also extend to the beneficiaries of that responsibility. In our setting, because the firm has corporate giving programs, the charity’s recipients are also firm stakeholders, and therefore an employee’s risk-taking decisions have implications for the charity.

A small but growing stream of research investigates how people take risks with “other” people’s money. These studies combine risk and responsibility to examine risk-taking behavior when decision-makers are accountable to another individual (e.g., Andersson et al. 2016; Pahlke et al. 2015) or group (e.g., Bolton et al. 2015b). Consistent with the saying “better safe than sorry,” the studies corroborate the notion that perceptions of social responsibility, or accountability, are associated with caution (Bolton et al. 2015b). Feeling responsible for other people’s money tends to motivate more careful investment strategies (Pollmann et al. 2014; Weigold and Schlenker 1991). A decision maker's responsibility or care for other people’s fortune (Charness and Jackson 2009) appears to align risk behavior more closely to the beneficiaries’ interests (Lefebvre and Vieider 2013).

We build on this reasoning when researching whether excessive risk-taking can be reduced by linking an investment decision to a charity. A charity’s known financial needs heighten employees’ altruism preferences, feelings of social responsibility, and inequality aversion (Andreoni and Miller 2002; Fehr and Schmidt 1999). We argue that such social or other-regarding preferences (Cooper and Kagel 2016) are likely to offset a decision maker’s propensity for excessive risk-taking. Employees should have an incentive to protect and bolster their firm’s, their own, and a charity’s financial health: excessive risk-taking behavior is contrary to the idea of firm sustainability.

Grounded in economics, agency theory models the firm as a nexus of contracts between principals who delegate services and agents who perform them (Jensen and Meckling 1976). As employees (i.e., agents) do not bear the full wealth effects of their decisions, employees’ risk orientation may not be perfectly aligned with that of the firm owners (i.e., principals). For example, overinflated equity compensation practices and a one-sided emphasis on yield may cause employees to incur unsustainably high debt levels (i.e., creating a malfunctioning incentive contract), resulting in principal-agent conflicts (Jensen and Meckling 1976; Till and Yount 2019). Firms minimize these conflicts through corporate policy and risk governance. Risk governance aims to establish supervisory and incentive mechanisms that align employees’ risk orientation with firm owners’ interests. Identifying those motivators is central to addressing principal-agent conflicts and strengthening a sustainable firm risk culture.

The traditional “homo economicus” model which underlies the agency theory-based research in this field, relies on pecuniary incentive components. In its simplest form, agents are assumed to be purely self-interested and have private utility increasing in earnings (Rebitzer and Taylor 2011). They do not attach the same value to more socially sophisticated elements, such as social norms or desires for altruism and charitable activities unless these elements will somehow affect an employee’s wealth.

Recent research is challenging the notion that employees are narrowly self-interested (Till and Yount 2019); instead, employees care for the proceeds generated for needy others, in addition to their own (Berg and Gigerenzer 2010). By sticking to social norms and displaying generally respected modes of conduct, people view themselves favorably: they are altruistic, generous, and helpful (Tonin and Vlassopoulos 2013). Individuals derive private value from the act of helping (Imas 2014; Rotemberg 2006); that is, they experience an emotional reward, the feeling of a “warm glow.” Firms can leverage individuals’ taste for altruism in several ways. For example, they can connect a work task to a meaningful outcome (Ariely et al. 2008) or emphasize the impact of tasks (Grant 2008) through corporate giving.

To investigate how firms may capitalize on employees’ social or other-regarding preferences (Cooper and Kagel 2016), especially their taste for altruism, Sitkin and Pablo (1992) identify three elements explaining employees’ risk behavior within a firm: individual characteristics, problem-related characteristics, and organizational characteristics. Their risk framework refines traditional principal-agent theory which is generally silent concerning the potential for social norms of other-regarding behavior to emerge in employees. For social norms to matter to an employee’s utility, they have to be efficacious—and to be efficacious, they must be salient. Essentially, situational cues lead an employee to interpret the decision context as one to which a given norm applies, pay attention to the norm, and conform to it (Bicchieri 2006, 2008). Positive motivational effects can be obtained by linking what employees value—or want to avoid—to measured outcomes (Nelson 2012). Beyond cash, firms use social incentives and integrate them into employees’ total reward and compensation package to guide their risk-taking (Nelson 2012; Sprinkle and Maines 2010).

Whereas some CSR incentive programs personally involve employees, making the individual employee accountable, other programs and program features more indirectly influence individual responses to work and dealing with risk (e.g., employees’ beliefs or perceptions concerning a firm’s involvement in CSR). As such, the firm’s incentive structure (economic incentives vs. economic and social incentives) communicates its objectives and sets its core values (profit-orientated goals vs. profit-orientated and social goals).

While “the role of ‘value systems’⁷ as a mechanism of management control” (Marginson 2009, 7) and the need for “an accountability-oriented control system” (Merchant and Otley 2006, 792) are generally acknowledged, the role of CSR and an employee’s personal accountability and empowerment in CSR play in the system is still open to debate. Burbano (2016) documents that employees respond to a socially responsible message about an employment situation with lower wage claims. Firms engaged in prosocial programs are viewed as more likable and more trustworthy (Burbano 2016; Fehrler and Przepiorka 2016). Employees reciprocate such prosocial signals with desirable, norm-compliant behavior (Kajackaite and Sliwka 2017). Hence, the mere presence of corporate giving changes the way decision-makers mentally frame the situation, causing them to perceive the firm as one that “does good.” As such, CSR actions likely foster the relational contract between employees and the firm (Valentine and Fleischman 2008).

Similarly, Durden (2008, 671) notes that “informal [or relational] control [is a] key aspect in developing a management control system that incorporates social responsibility considerations” and thus is central to risky organizational decision-making. Management control systems shape employees’ practices and support strategy. If used appropriately, these systems push employees toward socially sustainable business decisions (Gond et al. 2012). Based on these findings, we expect that a firm’s CSR activities, such as charitable contributions, will spill over to internal firm dealings (e.g., an employee’s investment decisions), resulting in less excessive risk-taking behavior and a higher firm value.

Senior management’s corporate strategy and mission statements incorporate CSR initiatives. Contributions (i.e., corporate giving programs) are often based on firm-wide performance. This message from the top conveys a signal to employees that the firm is socially responsible (“pro-CSR tone”) and sets a norm as to what is appropriate (Church et al. 2019). A firm that supports and engages in a prosocial activity tends to refrain from irresponsible, unsound, potentially harmful business decisions (e.g., excessive risk-taking). Rather, responsible and sustainable decision-making is preferred (Benabou and Tirole 2010; Bowles and Polanía-Reyes 2012; Joshi and Li 2016). Social norm activation theory (Bicchieri 2006) posits that an individual’s perceptions of expected behavior trigger concerns about complying with the norm (i.e., the expected behavior). Costly prosocial activities like corporate giving are likely to be a salient aspect of the employment setting, thus activating a norm of employee other-regarding behavior (Douthit et al. 2019). Because employees derive utility, or a “warm glow” feeling (Andreoni 1990), from helping others (i.e., the firm and/or charity), we assert that this social norm-based influence from the top will restrain employees from taking excessive risk. Employees will reciprocate the firm’s socially responsible message with norm-compliant behavior (Kajackaite and Sliwka 2017; Noreen 1988).

Our conceptual mediation model (Fig. 1) illustrates how the presence of corporate-level giving affects employees’ perceptions of the firm’s prosocial business practices, a signal of senior management’s expectations of employees’ risk-taking behavior. Corporate giving communicates to employees that excessive risk-taking on behalf of the firm is unwelcome because excessive risk-taking behavior can endanger the firm’s financial viability and its prosocial direction. We expect employees’ decision problems to be framed in terms of other-regarding and society-serving objectives when a portion of overall firm earnings is donated to charity: overly risky behavior would not comply with the firm’s norm of other-regarding behavior. All else equal, the presence of corporate-level giving should lead employees to mentally frame the firm as one that “does good”⁸ and also induces employees to employ “healthy” risk levels that serve the firm’s prosocial practices.

However, due to their indirect and broad nature, corporate-level donations are not directly tied to individual employees' daily work, and thus an employee’s contribution is not transparent. Firm-based performance measures aggregate the relationship between specific activities (e.g., risk-taking decisions) and their consequences. Therefore, such obscure measures are inadequate for understanding the impacts of an employee’s excessive risk-taking decisions. Rather, corporate-level giving may be best imagined as a portfolio of projects—some of which have positive impacts, others with negative impacts and still others with small or no net prosocial impacts (Corbett et al. 2018). Consequently, donations at the corporate level are remote from the employee and bring about controllability problems (Merchant and van der Stede 2017). These donations precipitate a “diffusion of responsibility” (Charness and Jackson 2009; Latané and Nida 1981) since only a few top senior managers in the firm, i.e., those who can make strategic decisions, significantly influence them. They say little about the performance and excessive risk-taking decisions of individuals lower in the firm’s hierarchy. As a result, because corporate-level giving is outside an employee’s purview and control (and sometimes awareness), it may lose any individual employee's value or incentive effect.

Since there has been little prior research as to whether corporate-level giving is salient enough to prime or activate a norm of other-regarding behavior, our first hypothesis is as follows, stated in the null:

In deriving our second hypothesis, we add to senior management’s “pro-CSR tone” (i.e., giving to charity) with perceived accountability. Pirson and Turnbull (2016) argue that decentralized corporate governance structures handle CSR complexity better than centralized structures. Church et al. (2019) observe that large corporations often decentralize CSR decision-making to facilitate CSR implementation and promote morale. In these corporations, after senior management has determined the overall CSR strategy, middle managers’ and rank-and-file-employees’ investment decisions are linked to CSR (e.g., using project-level performance as the measurement basis for decision-making). In this case, project-level performance directly determines the amount of charitable giving which the individual employees achieve—unlike a corporate giving program established at the top of the firm that socially influences or primes the individual employees lower in the hierarchy with its prosocial signals radiating to them (H1).

In this setting, the amount the firm donates to charity is tied to the success of an individual employee’s specific projects (project-level giving) rather than overall firm success. The project setting is employee-centered and reduces the “diffusion of responsibility” inherent in corporate-level giving programs focusing on senior management’s CSR policy. Employees move from being influenced (H1) to being personally responsible (H2) as they perceive control over and feel personally accountable for the project outcome. Following accountability theory (Lerner and Tetlock 1999), the perceived importance or salience of excessive risk-taking consequences will be greater than when corporate-level decision-making conceals an individual contribution (Merchant and van der Stede 2017). Linking project-level performance to charitable giving makes harming the welfare of “others,” i.e., the potential loss to the charity, more transparent to employees and has a greater effect than when giving is based on overall corporate performance. Employees “should be able to see more clearly how the design of social projects affects specific social and economic outcomes for the [charitable recipients] and how they benefit the organization along the same outcome dimensions” (Salazar et al. 2012, 176).

Employees thoroughly evaluate the investment problem and the available options to choose the option most clearly defensible due to feelings of controllability and personal accountability (Simonson and Nye 1992). Decision-makers attach weight to the loss-probability of excessive risk allocations and view such an investment as overly loss-prone. Employees dislike feeling accountable for relatively probable negative outcomes, and personal accountability deters harming others (Hall et al. 2007). For employees in charge of the investment project, excessive risk-avoiding behavior becomes relatively more important. They understand their responsibility for a poor outcome to the firm and, by extension, to the charity and anticipate guilt, regret, or dissatisfaction (Pham 2007). Ceteris paribus, as shown in Fig. 2, we expect that the positive (i.e., excessive risk-diminishing) effect between the corporate giving program and excessive risk-taking is mediated through the impact of employees’ perceived accountability for charitable contributions.

To summarize, because the investment outcome is within their scope of responsibility, employees perceive personal accountability to decide in the firm's and the charity’s best interests, i.e., engage in less overly risky behaviors. Thus, we expect the project-level giving contract to encourage a more conservative approach (i.e., a cautious shift) and align risk-taking decisions with corporate economic goals. Formally, our second hypothesis is in the alternate form:

Next, we explore the effect of employees’ participation in selecting the charity as the project’s payoff beneficiary. The employee’s empowerment shifts from personal responsibility (H2) to personal involvement (H3). Since the employee chooses the charity, the firm’s prosocial mission likely matches employees’ individual needs and beliefs (Koppel and Regner 2014; Smith 2016). Employee involvement in charity selection provides a better mission match with the charity type and purpose, leading to higher emotional proximity. Recently, Resh et al. (2018) propose that “mission match” and identification with the organization’s mission are more significant than broad-based, other-regarding, or societal orientations which persistently increase employees’ prosocial effort. But theory and research leave it open whether this finding can also be generalized to excessive risk-taking behavior.

If project specificity, personal connection, and emotional proximity were the mechanisms for excessive risk-taking mitigation, we would expect charity selection to have the lowest level of excessive risk allocations. The idea is that employees sympathize more strongly with the charity and its objectives (Akerlof and Kranton 2005; Small and Simonsohn 2008) when selecting the charitable cause than when the firm’s senior management holistically selects on behalf of the firm. Given this sympathy, employees may be more motivated to decide in the best interests of their chosen charity (Charness and Gneezy 2008; Montinari and Rancan 2018). We expect employees to make more careful and conservative decisions for a socially close charity to provide the highest expected payout.

However, active engagement and empowerment in a firm’s CSR issues could lead to irresponsible decision-making due to motivated reasoning (Kunda 1990). Motivated reasoning means that individuals tend to access and interpret available information consistent with their preferences and expectations, especially when they have a strong emotional stake in the decision. Personal involvement in the charity selection process creates an emotional stake that may make an employee engage in motivated reasoning—based on what the employee wants to believe. Charity selection may shift employee motivation from being “an appropriate investment allocation” (accuracy goal) to “reaching a desired investment outcome” (directional goal) for the selected charity. This new focus causes employees to emphasize the favorable project outcome and ignore the possibility of a loss (Hales 2007). Such an emotional or irrational response may arise since customized charitable contributions stem from the heart (Small 2011), and affective responses to vivid objects tend to be more extreme than reason-based assessments (Pham 2007).

Further research highlights that pleasant emotions such as enthusiasm trigger generally optimistic risk assessments (Druckman and McDermott 2008 and the references cited here). People judge risk by what they think and how they feel about it (Slovic and Peters 2006). Given that employees feel favorable towards the selected charity, they are more likely to judge the risks (benefits) of a risky option as low (high) (affect heuristic; Slovic et al. 2007). Although the odds of a large gain are extremely low, a risky decision could lead to a large gain and enhance the charity’s welfare more than the less risky option. As employees become more personally involved in CSR decision-making, they will likely experience unpleasant emotions related to the prospect of not taking the risky option. Specifically, they will anticipate regretting having waived the favorable investment outcome. Employees’ attention moves from the security potential of investments (i.e., where they focus on the worst possible outcomes and weigh them heavily in decision-making) to aspiration (Luft and Shields 2009; March and Shapira 1992). Their impact on their chosen charity in mind may drive employees to emphasize the best possible outcomes and weigh these outcomes more heavily in risky decision-making. Consequently, they are willing to undertake high-risk, high-return projects.

Since theory and extant literature are relatively unambiguous as to which of the competing forces prevails, we posit the following hypothesis:

To test our hypotheses, we conduct a 1 × 4 × 10 mixed-design laboratory experiment. We vary between subjects, the presence and type of the corporate giving program among four treatment conditions: no giving, corporate-level giving, project-level giving, and charity selection.⁹ To rule out one-time effects and detect end-game strategies (Schedlinsky et al. 2018), we conduct ten independent rounds with the same performance-based compensation scheme across all rounds and conditions.

Participants make ten identical investment decisions that influence either overall firm earnings (no giving and corporate-level giving) or individual project performance (project-level giving and charity selection). In our baseline condition, no giving, overall firm profit is distributed to the shareholders, an anonymous group of investment decision beneficiaries. Before making investment decisions, participants assigned to the corporate-level giving condition learn that 10%¹⁰ of the overall firm profit donations, including their investment decisions’ payoff, are donated to senior management’s chosen charity, the American Red Cross. Participants assigned to the project-level giving (charity selection) condition learn that 10% of their investment project’s payoff is directly, i.e., independent of overall firm performance, sent to senior management’s identified charity, the American Red Cross (the individual participant’s chosen charity). The amount that goes to the charity is calculated similarly across the giving treatments. Any distinction between these treatments is due to employee empowerment and, because prosocial norms are highly context-sensitive (Bicchieri 2008), the framing of the charitable contribution.¹¹ Table 1, Panel A, depicts the experiment material’s exact wording of the firm’s senior management’s stated strategic goals.

We use z-Tree software to conduct our experimental risk-taking task that involves the investment decisions (Fischbacher 2007). Based on an adapted version of Gneezy and Potters' (1997) risky lottery, participants receive an endowment of 100 points to allocate between two investment options. These investment options are labeled investment alternatives A and B to avoid framing language effects.¹² As long as the 100 points remain fully invested, the allocation of the 100-point endowment is at the participant’s discretion.¹³ The amount invested in alternative B, our primary dependent variable, is our proxy for excessive risk-taking. Economically, each marginal increment invested in investment B means accepting excessive risk and, due to its inferior expected value (ratio of \(0.8\overline{3}\) to 1), is detrimental to the firm.

The widely used Gneezy and Potters' (1997) risk elicitation method supports loss aversion in financial decisions of both students and professionals (see Charness et al. 2013 for a review). We chose the Gneezy and Potters' (1997) risky lottery because it requires participants to choose between no risk (and no chance of increasing their money through investment) and excessive risk (a chance of increasing their money through investment, but at a lower expected value).To obtain a clear decision rule, we concentrate on excessive risk-taking as the only risk option (Brink et al. 2017; Schedlinsky et al. 2016). Taking the additional risk has harmful effects on the employee, the shareholders, and the charity. If we had broadened our focus and added a third positive net present value investment alternative (i.e., with an expected value above one) covering (profitable) risk, taking on more risk would have been desirable depending on the participant’s risk-taking propensity. Our experimental approach was to construct a situation where the optimal strategy was to take no risk, regardless of the individual participant’s risk-taking propensity (Eriksen and Kvaløy 2017) and then vary the charitable giving frame.¹⁴ Although the task does not distinguish between risk-neutral and risk-averse behavior, controlling for attitude toward risk, the amount allotted to alternative B provides a fairly good metric for capturing treatment effects in excessive risk-taking behavior (Charness et al. 2013). Individuals choose among risky prospects by balancing the value of the possible consequences, comparing all available options and possible outcomes, and incorporating factors of the business environment (Mellers 2000; Simonson 1989). In our simplified decision-making environment, by construction, the less employees invest in alternative B, the less they destroy firm value and the more they act in their firm’s best interests. The investment outcome of the most recent investment decision (total investment payoff) and the allocation to the participants and to charity, respectively, are reported at the end of each round (of the experiment).

The participants were recruited from a large Midwestern US university. In total, 129 students took part in the experiment. Students who answered at least one out of three manipulation check (MC) questions incorrectly (30) were excluded from the statistical analysis.¹⁵ The resulting population consisted of 99 participants (MC sample), 48 females (48.48%) and 51 males (51.52%).¹⁶ Their mean (median) age was 22.45 (21) years, with 90% between 19 and 27. Most participants reported their major as accounting (44.44%), finance (27.27%), or marketing (18.18%), and they were primarily enrolled in undergraduate-level courses (84.85%); the remaining ones were graduate students. Nearly all participants (95%) had attended at least one college-level math class. There are no significant differences across our four conditions in terms of gender, age, lab experience, current year of study, current grade status, current overall grade, and attendance of business ethics, finance, and math classes (all p > 0.10).¹⁷ Our experiment considers students a representative population since work experience or specialized knowledge is not needed to test our proposed causal relationship between charitable giving and excessive risk-taking. Experiments on social preferences conducted with students typically set the lower bound for prosocial behavior (Belot et al. 2015; Cooper and Kagel 2016), especially when economics students participate in experiments (Cappelen et al. 2015).

Upon arrival, the participants were randomly assigned to one of the four conditions. The participants first read instructions that provided general information about the experiment, outlined the session’s procedures, and then answered questions designed to measure their risk propensity from the Domain-Specific Risk-Taking (DOSPERT) scale (Blais and Weber 2006). We selected twelve questions covering decision situations in the financial and social risk domain. The question sheet differentiates between the main risk propensity scale (1 = extremely unlikely; 11 = extremely likely) and a risk perception subscale (1 = not at all risky; 11 = extremely risky). A high (low) risk propensity (risk perception) score indicates a high probability of being risk-seeking in domain-specific decision situations.¹⁸ While we collected risk propensity data at the outset of the experiment, the four-item risk perception scores were gathered after the investment task had been completed. Thus, we can determine if our framed charitable giving manipulation was strong enough to alter the participants’ risk perceptions relative to their initial risk propensity (Blais and Weber 2006; Sitkin and Pablo 1992). Moreover, eliciting risk preferences ex ante allows for an undistorted measure of individual risk propensity (Brink et al. 2017; Schedlinsky et al. 2016).¹⁹

Next, the participants read the second set of experimental instructions and completed a comprehension quiz on the experimental instructions. Participants were required to answer all understanding check questions correctly before the session continued.²⁰ Participants in the giving treatments reviewed fact sheets about the American Red Cross (corporate- and project-level giving) and the other charities (charity selection). Participants in the charity selection treatment-group (charity selection) selected their charity.²¹

After two practice rounds and ten rounds of the investment task, participants completed a post-experimental questionnaire. In addition to process-related data and the DOSPERT scale mentioned above, the post-experimental questionnaire covers other personality-related influences. Specifically, we control for participants’ prosocial disposition using a reduced version of the self-reported altruism scale (Rushton et al. 1981) and select suitable dimensions from the Revised NEO Personality Inventory (Costa and McCrae 1992). Finally, the post-experimental questionnaire includes MCs and demographics. Because all the data was recorded without personal identifiers, our procedures guaranteed participant anonymity. Figure 2 of the supplemental data illustrates the experiment’s steps in chronological order.

During the experiment, all earnings and profits are measured in points, our experimental currency. After converting points to US dollars, each participant earned their variable payment in addition to a $4.80 appearance fee and a flat payment for answering pre- and post-experimental questions ($8.52 to $9.84).²² The variable payment was based on both luck (random draw) and participants’ investment decisions and could range from $0 to $10. To allow for comparison, participants across all treatments earned 10% of the payoff from their investment choices. We held the percentage of individual variable pay constant to rule out that self-serving beliefs or self-regarding (vs. other-regarding) behavior would bias our results (c.f. Haisley and Weber 2010). That is, there is evidence that compensation contracts and certain features thereof (i.e., levels of incentive pay) affect employees’ (excessive) risk-taking behavior (e.g., Brink et al. 2017; Dittmann et al. 2011; Kreilkamp et al. 2019). Since our study discusses prosocial features of the firm’s incentive system rather than “appropriate” compensation structures, we kept the participants’ variable compensation structure constant across conditions. We used a variable compensation scheme to prime participants to think carefully about their investment decisions and reveal their “true” risk-taking behavior (i.e., to ensure incentive compatibility in individual decision behavior).²³

On average, participants earned $17.82 for approximately 100 minutes of participation.²⁴ The maximum (minimum) compensation was $21.17 ($14.86). Like the participants’ payments, the charitable organizations’ points were converted to US dollars at the end of each session. On average, participants earned $3.57 on behalf of the charity. The maximum (minimum) donation per participant was $6.77 ($0.60).

To verify internal design validity and rule out the possibility of personality-related traits distorting our results, we check for potential sources of overconfidence (Pikulina et al. 2017) and excessive risk-taking (e.g., Nicholson et al. 2005). We observe that both anxiety (F = 10.35, p = 0.002) and seeking excitement (F = 22.09, p < 0.001) explain participants’ risk propensity. However, neither personality-related trait significantly differs across treatments, nor do narcissism and striving for achievement (all p > 0.479). Consequently, randomization appears successful: idiosyncratic influences should not interfere with our conclusions.

Using post-experimental questions, we confirm that the level of employee empowerment continuously rises, starting from a social norm-based influence on corporate level (H1) to personal responsibility on project level (H2), and ending with personal involvement, when employees pick the charity (H3). The first question asked participants to indicate agreement with the statement that they felt the firm empowers its employees. Participants’ mean responses on a scale ranging from one (strongly disagree) to 11 (strongly agree) increase from 7.93, for no giving, to 9.16, for charity selection and differ significantly across treatments (F = 2.29, p = 0.084). Notably, the no-giving condition participants’ answers differ significantly from those in the three giving treatments (t = −2.31, p = 0.023), with answers significantly higher under the project-level giving and charity selection conditions (t = −2.40, p = 0.019). The second Likert scale-item asked participants to indicate to what extent they felt they played a part in the firm’s goals and activities (one = very untrue of me; 11 = very true of me). Participants’ mean response of 7.86 (9.00), when giving is absent (present) (t = −2.98, p = 0.004) and ANOVA statistics (F = 3.03, p = 0.033) provide corroborating evidence of distinct levels of perceived organizational commitment and employee empowerment across conditions.

Prior research shows that employees who are primarily motivated by a “mission” or attach meaning or purpose to their job are happier, exert more effort, and accept lower wages (Pratt and Ashforth 2003; Prendergast 2007). Therefore, for our manipulation to be successful, it is crucial that participants consider the charity’s mission and work worthwhile and attach meaning to their decisions on risky prospects (Carpenter and Gong 2016). Indeed, we find that participants in the corporate- and project-level giving conditions (charity selection condition) expressed the deservingness of the American Red Cross (their chosen charity). They rated the charity’s mission and work positively, as suggested by the mean response of 9.09 (9.92) which is significantly greater than the scale midpoint (t = 11.02 (t = 13.09), both p < 0.001). We conclude that our manipulation was successful and induced meaningfulness at work.

Our primary dependent variable, excessive risk allocation, is measured as the proportion invested in investment alternative B (risky lottery). Table 2 reports the number of participants per treatment, the means, and standard deviations for all four treatments. Figure 3 illustrates the mean excessive risk allocation for our four treatments and all rounds graphically. Over the ten rounds, the average excessive risk allocation is lowest under the project-level giving program (36.25 points), higher under charity selection (42.04 points). It is highest under no-giving (47.23 points) and the corporate-level giving program (48.71 points).

Beyond these between-treatment effects, we also observe marked round effects. Comparing the first and last rounds, participants become more risk-seeking over time across all conditions (rounds one to five, 41.77 points; rounds six to ten, 45.37 points, t = −1.78, p = 0.075). Additionally, a relatively strong risky shift emerges in the corporate-level giving (rounds one to five, 46.51 points; rounds six to ten, 50.90 points, t = −1.04, p = 0.301) and the no-giving treatment (rounds one to five, 42.80 points; rounds six to ten, 51.66 points, t = −2.37, p = 0.018). In contrast, the excessive risk allocation for participants in the project-level giving treatment, where the firm’s senior management determines the charity, remains comparatively low (rounds one to five, 37.59 points; rounds six to ten, 34.91 points, t = 0.70, p = 0.482). Participants who select their charity of choice are moderately willing to take more excessive risks over time (rounds one to five, 40.58 points; rounds six to ten, 43.49 points, t = −0.69, p = 0.494). Preliminary indications suggest that relative to the other treatments, project-level giving appears to be the most effective design for reducing excessive risk-taking, both in the short and long term.

To test our hypotheses, we performed a repeated-measures analysis of covariance (RM-ANCOVA), with the number of points invested in investment alternative B (the risky lottery) as our dependent variable. Our first independent variable is corporate giving, measured in four ways: (i) no giving, (ii) corporate-level giving, (iii) project-level giving, and (iv) charity selection. The second independent variable, round, is our within-subject factor. The analysis includes the ex-ante (ex-post) measured financial risk propensity (level of altruism). Specifically, we use factor analysis to aggregate six items measuring participants’ financial risk propensity into a single financial risk-propensity factor (eigenvalue = 2.35; explained variance = 0.80). Our measure of individual altruism is derived from Rushton et al.'s (1981) self-reported altruism scale, focusing on those items most related to charitable donations and prosocial behavior. The original self-report altruism scale (Rushton et al. 1981) is an instrument designed to elicit previous prosocial behavior, including donating money to charity. We calculate Cronbach's alpha to assess the inter-item covariance for all the item pairs and determine the constructed scale's reliability.²⁵ Next, we use factor analysis to combine the six items into a single altruism factor (eigenvalue = 1.78; explained variance = 1.20). Table 3 presents the computed principal factors for financial risk propensity and altruism.

Table 3, Panels A to D, shows the RM-ANCOVA results from our hypotheses tests. We find both financial risk propensity and the level of altruism, our covariates, to be significantly related to the excessive risk-taking decision (financial risk propensity, F = 11.87, p < 0.01; altruism, F = 4.48, p = 0.03). Furthermore, the effects of the presence and type of the corporate giving program (“giving”) on participants’ excessive risk allocations are statistically significant F = 8.14, p < 0.01).²⁶ We employ contrast coding as a post-estimation test to examine the predicted treatment and time effects. Hypothesis H1 is stated in the null and posits that, relative to no giving, excessive risk-taking is not lower if corporate-level giving is present. While we find “giving” to have a significant impact on excessive risk-taking (F = 8.14, p < 0.01, Panel A), we fail to find evidence to support that corporate-level giving decreases excessive risk-taking (F = 0.15, p = 0.69, Panel B). Charitable giving at the overall corporate level—a widespread practice—emphasizes senior management’s CSR objectives. However, these objectives may not be salient for employees, and they may be too far removed to spill over to their investment decision-making. We further employ the method of orthogonal polynomial contrasts to test for a linear trend. As reported in Panel C, the interaction effect between corporate-level giving vs. no giving and round is insignificant (F = 1.19, p = 0.28). Hence, participants’ excessive risk allocation is not significantly different over time between the no giving and the corporate-level giving treatment (i.e., no systematic different linear time trends). Collectively, H1 is not validated (i.e., cannot be rejected) by the experiment.

Recall that our second hypothesis predicts lower excessive risk-taking when charitable giving is directly linked to individual project performance rather than overall firm profit. As depicted in Table 4, Panel B, the contrast analysis indicates a significant main effect of project-level giving (F = 17.38, p < 0.001).²⁷ The insignificant interaction between project-level giving vs. corporate-level giving and round (Panel C) indicates that this is not a one-time effect (F = 0.56, p = 0.46), thus providing full support for H2. Participants’ excessive risk allocations in the project-level giving design remain consistently below corporate-level giving design participants. We conclude that project-level giving is effective and persistent in moderating excessive risk-taking behavior. The project-level incentive contract remains salient to the employee, and we do not observe a diffusion of personal responsibility in the short or long term. The perceived accountability effect of project-level giving appears to be long-lasting.

When developing H1, we argue that senior management’s decision to implement a corporate-level giving program creates a social influence and activates a social norm of other-regarding behavior in employees. The mediation model in Fig. 1 investigates the effect of the presence of a corporate giving program on excessive risk allocations mediated by social norm activation. While we find that social norm activation significantly diminishes employees’ excessive risk allocations (Link 2b: p < 0.001), both the direct (Link 1: p = 0.12) and indirect effect of the presence of a corporate giving program on social norm activation (Link 2a: = p = 0.53) are insignificant. Importantly, when we replace social norm activation with employees’ perceived accountability (Fig. 2), the indirect effect of the type of the corporate giving program on employees’ excessive risk allocations is significant (Link 2a × Link 2b; p = 0.08 × 0.01), while the direct effect is still insignificant (Link 1; p = 0.66). We infer full mediation. These results are entirely congruent with the statistical support of H2.

Our third hypothesis addresses whether employees’ excessive risk decisions are influenced by who selects the charity as the project’s payoff beneficiary (the firm vs. the employee). Table 4, Panels A to C, presents the RM-ANCOVA results. Consistent with our initial descriptive analysis and our reasoning, participants make larger excessive risk allocations when selecting their charity relative to when senior management selects the beneficiary charity. We observe a marginal statistically significant risky shift (F = 2.87, p = 0.09, Panel B).²⁸ This effect does not vanish over time, as indicated by the insignificant interaction charity selection vs. project-level giving × round (F = 1.43, p = 0.23, Panel C). When employees are empowered to choose the benefiting charity, we find that firms are more likely to suffer from excessive risk-taking behavior. We conclude an inverted U-shaped curve of effectiveness so that employee selection of the beneficiary may negate project-level giving benefits. Hence, we identify a potential drawback of corporate giving programs that employees actively participate in, as outlined in current charitable giving reports (e.g., Giving USA Foundation™ 2017). This result is notable as it implies that personal involvement in designating the recipient charity (“employee CSR-empowerment”) may encourage employees to engage in risk-seeking behaviors in the hope of a low-probability but high payoff.

Incentive contracts are crafted to align the interests of principals and agents (Luft and Shields 2009). While tournament and short-term incentive contracts have been used extensively, both suffer from creating excess risk-taking incentives. We argue that CSR initiatives, like corporate giving programs, can be an effective component in an incentive contract in that they provide a remedy for excessive risk-taking. Salazar et al. (2012, 176) argue that “approaches to firm-level social performance evaluation hide the real relationships between the social activity and its consequences for firm economic performance and social impacts.” Our results suggest that individual compensation plans that link project outcomes to corporate giving programs reveal this real relationship and thus appear promising. Charitable contributions at the project level diminish employees’ excessive risk-taking, and importantly, this effect persists over time. We show that employees are relatively riskier in the short and long term when a global metric (i.e., not the individual employee) is emphasized; the corporate giving policy is perceived as the senior management’s responsibility. Indeed, our mediation model identifies employees’ perceived accountability as the mechanism through which the structure of a corporate giving program constrains excessive risk-taking. Making employees personally responsible for charitable giving enhances the perceived responsibility for and the impact of helping, thereby reducing excessive risk-taking in the long term. By contrast, corporate-level cues are too subtle or remote from the decision-maker to achieve the desired behavioral responses in our setting. We speculate that when employees are responsible for the charity’s payoff, the charitable beneficiary becomes more salient and identifiable for them, sticking in employees’ memories.

While our setting is charitable giving, our results generalize and highlight that the feeling of controllability is likely to be important (per se) when designing incentives. Employees have a minimal impact on the donation when charitable giving is tied to firm performance. Employee controllability and responses increase when tied to individual projects (Merchant and van der Stede 2017). In the broadest terms, our findings corroborate the view that “CSR is integral to management control systems” (Costas and Kärreman 2013, 395; see also Lueg and Radlach 2016) and influence internal dynamics. Nevertheless, for CSR corporate discourses and practices to be a form of management control “that ties employees’ aspirational identities and ethical conscience to the organization” (Costas and Kärreman 2013, 394), employees must see themselves as meaningful agents within their area of responsibility. Consistent with the idea that “all motivation starts with the individual” (Nelson 2018, 14), the firm’s incentive system appears to need employees’ perceived accountability for other-regarding behavior (and controllability over the outcome) to “cue” or trigger that social norm of other-regarding behavior (Bicchieri 2006). Communicating the firm’s objectives via employees’ incentive structure (of which charitable donations may be only one part) tends to be insufficient to activate the norm and make employees allocate the firm’s resources in its best interests. The firm may have the best corporate-level CSR activities, but if its employees are not motivated by those activities, they will not inform employees' decision-making and, accordingly, not help the firm.

In a related study, Balakrishnan et al. (2011) report that corporate giving motivates employees to contribute to organizational endeavors so that corporate giving pays off financially. Our results extend this finding to the context of excessive risk-taking, where the rational strategy is to take no risk. Our data resonates with Balakrishnan et al.'s (2011) reasoning that senior management should consider both external and internal stakeholder groups when designing prosocial giving programs and their behavioral consequences on excessive risk-taking within the firm. Specifically, our study highlights the effectiveness of more creative solutions than a firm-wide corporate giving program and recommends an alternative possibility for firms to implement CSR initiatives. We suggest that project-level giving serves as a powerful contracting benefit that firms can harness to keep employees from taking excessive risk and encourage them to create shared value. Our experiment expands Bicchieri's (2006) idea that norms influence behavior only when they are salient or focal for the individual at the time of behavior. Because project-level giving is employee-centered—highlighting personal responsibility and individual, rather than a firm-wide agency—this design feature triggers norm-compliant behavior (i.e., taking less excessive risk in a decision also affecting a charitable beneficiary). The firm’s corporate giving program seems to require personal responsibility that leads employees to interpret the environment as one to which the norm of other-regarding behavior applies, focus on the norm, and act accordingly. Hence, our study advances the literature exploring the mechanisms via which CSR curbs excessive risk-taking and thus increases firm value (e.g., Harjoto and Laksmana 2018). Following this, our results underline the conventional wisdom that the feeling of controllability is important when designing incentives to produce desired outcomes. Standard employee engagement practice takes a passive management control approach, which causes employees to think of what is being done to them rather than what they are doing for themselves is mutually beneficial for others (Nelson 2018). Our investigation addresses the role of controllability and individual agency to influence business activities (that might not necessarily relate to CSR), an important part of moving from aspirations to actions (Corbett et al. 2018; Wolfgramm et al. 2015).

We also contribute to the growing literature stream on risk-taking on others' behalf (Bolton et al. 2015b). Although the traditional economic theory is silent on how risk is taken on another’s behalf, we observe less risk-seeking behavior when the risk is taken on behalf of those in need. This finding supports the widely held view that individuals exhibit social preferences when paired with perceived personal responsibility. We present both corporate giving programs that attenuate excessive risk-taking persistently (project-level giving) and others that incentivize greater risk-taking (corporate-level giving or charity selection).

Finally, while our experiment examines the effect of different corporate giving programs on excessive risk-taking, the theory on which our predictions are based should extend to a broader set of CSR contracts (with other social welfare or environmental criteria, e.g., emission reduction targets) that tie the pay of employees to project-level performance as well. Our findings may also apply to other forms of dysfunctional decision-making or undesirable employee behavior. For example, the literature on other-regarding preferences indicates that employees abstain from socially-oriented misreporting, cheating, or other fraudulent behavior when the decision benefits a social mission (e.g., Hobson et al. 2019).

Our study’s limitations provide fruitful avenues for future research. First, the experimental setting used in the current study expects charitable incentives to create a positive signal about the firm’s benevolence and trustworthiness. However, both anecdotal and empirical evidence indicate that managers use charitable donations for self-serving interests at the expense of firm value. Brown et al. (2006, 856), for instance, claim that "the [corporate philanthropy] literature is intertwined with the ‘social responsibility of business’ debate," and Masulis and Reza (2015) document that CEOs misuse firm resources by supporting their preferred charities (i.e., CEO’s “pet” projects) through corporate donations. On a related note, Cassar and Meier (2017) find that some prosocial incentives backfire. While these incentives are employed instrumentally to benefit the firm (or the firm’s senior management) rather than the charity, future research might explore the mechanisms that lead to a negative signaling value and integrate intentions for doing good or the authenticity of the firm’s CSR program into the experimental design (McShane and Cunningham 2012).

Second, our approach proposes that employees’ internal motivation is the mechanism to decrease their excessive risk-taking behavior. Since H1 is not validated and H2 is, we surmise that employees' decrease of excessive risk behavior is a function of their reputation gained from having a more positive net present value project. However, since impression management requires an actor and a target audience (Bolino et al. 2016), we do not include the firm’s senior management as a “real person” in the experimental setup. To mitigate such impression management or related forms of self-interest or reputational considerations alike, our approach differs from other accounting experiments with employee-employer-groups (e.g., Christ and Vance 2018). Future experiments may use more realistic settings to investigate the firm’s senior management role in creating impression management tactics.

Third, to examine time effects (e.g., habituation, fading, or end-round strategies), the outcomes and probabilities of winning the risky investment alternative remain constant over all rounds. Future research could alter the risky investment option's payoff structure to test whether, as postulated by prospect theory, employees’ investment behavior turns riskier in the low-probability, high-outcome (high-gain) domain (Pahlke et al. 2015). Further, with the only options of no risk or bad risk, this study ignores the notion that firms will reasonably expect some risk-taking. Additional research could look at risky decision-making with an acceptable expected value above one, yielding a positive net present value project.

Fourth, adding employees’ compensation scheme to examine the interplay between the corporate giving design and monetary incentives could provide additional insight into the value employees place on prosocial incentives. In particular, asymmetrical payment structures may prove fruitful, with personal losses limited and employees shielded from their decisions' full negative repercussions (Brink et al. 2017). Finally, cash donations to charity are only one manifestation of a giving program in the workplace. Non-cash workplace giving designs, such as time off to volunteer, have been increasingly popular in practice. Thus, it would be worthwhile analyzing the impact of other workplace giving forms, most notably non-cash ones, on excessive risk-taking behavior.