If you were a division manager in a large firm, which of the following compensation packages would you prefer:

(a) salary of f50000, with no bonus;

(b) salary of BO 000, plus an annual bonus of 10% of the excess of your division's profit over budget. (You are not sure exactly what to expect because the environment is uncertain, but your best guess is that your division will exceed its profit budget by f200000.)

Does your choice identify you as risk averse or risk loving? If all managers in the firm were like yourself, what implications would that have for the design of incentive compensation schemes?