How compensation plans affect people’s Life Cycle theory of Consumption and Saving

In the following study I examine the effect of different compensation plans on employees’ risk attitude, rate of discounting and raving rate. I predict that compensation plans offering floating salaries, that is wage raises based on the years of employment (later mentioned as SMarT type), will come with the effects of more risk averse profiles, more patience (low discount rate) and higher saving rate. I use an online survey to measure and categorize the profiles of individuals regarding the three different economic elements of employees mentioned above. The findings of the thesis do not show any causal relation between the type of compensation plan and the three variables that describe economic behavior. That is why the econometric models used suffered in terms of explanatory power. It would be interesting to mention, though, that the findings showed some indication on the hypotheses, since in all the cases the forecasted relation was actually observed in the models. Nevertheless, other indicators such as years of experience or participants’ perceived economic condition seem to significantly affect the probabilities for risk loving, discounting and saving. Future implications of this research include testing for applicability in real companies’ employees and investigation of whether pension schemes have an effect on economic behavior as it is described by the three aforementioned elements. The potential findings from people that are actually under SMarT type of compensation plans will, for sure, be more realistic and they could possibly underline a causal relation with risk attitude, discounting rate and saving rate.