The impact of risk perception on developing incentive systems for relational contracting

Financial incentives, specifically refer to risk/reward sharing arrangements, have been seen as an important way of facilitating relational contracting. Although there has been a great interest in developing appropriate incentive systems, still very little literature focuses on the impact of risk perception on risk/reward sharing arrangements. Taking into account risk characteristics in relational contracting, this study proposes a theoretical model in order to extend the understanding of relational and performance risk perception to the formulation of financial incentives from social and individual perspectives, and then validates the model for assessing the relationships among social and individual factors, risk perception and financial incentives with structural equation modeling in the context of integrated project teams. Data collected from 238 members in China can provide support for the proposed model. The results demonstrate that both relational and performance risk perception are significantly related to financial incentive, and social interaction ties, trust, shared vision, control ability and self-efficacy can reduce participants’ perceived level of risk. This study suggests that participants’ social capital and individual cognition should not be ignored when developing incentive systems for relational contracting.