An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks.

Question

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Designing compensation arrangements involves balancing the need to provide incentives for employees to perform well with the potential risks associated with certain compensation structures. For example, some forms of incentive pay may motivate employees to take excessive risks, which could harm the organization in the long run. Therefore, finding the right balance between incentivizing employees and mitigating risk is an important consideration in compensation design.

An Important Consideration in Designing Compensation Arrangements Is the Tradeoff