In this study, we examined the effects of graphical and product diversifications on downside risk. Then, we also investigated the relationship between downside risk and incentive pay. The sample comprised of 168 firms and 1622 managers drawn for Standard & Poor's COMPUSTAT database. Hypotheses were tested by regression analysis. Results indicated that firms with greater related diversification obtained lower levels of downside risk. In addition, downside risk was signigicntly related to incentive pay. Implications of the current study and directions for future research are discussed.