Employee Compensation Contracts and Firm Performance in Uncertain Environments Empirical Evidence for Adjusting Pay-Performance Sensitivity

37 Pages Posted: 2 Aug 2009

See all articles by Joanna L.Y. Ho

Joanna L.Y. Ho

University of California, Irvine - Accounting Area

Ling-Chu Lee

National Pingtung Institute of Commerce

Anne Wu

National Chengchi University (Taipei)

Date Written: July 31, 2009

Abstract

Agency theory argues that pay-performance sensitivity should be negatively associated with risk. Yet, empirical studies have reported mixed findings on this relationship, which may be attributable to such confounding factors as different levels of delegation and monitoring costs. Extending prior research, we use data from the proprietary database of a major car dealership in Taiwan to examine the relationships among risk, employee compensation contract design, and firm performance. Results show that pay-performance sensitivity (incentive) for salespersons is negatively associated with risk (i.e., volatility of sales volume), which supports the prediction of agency theory. Importantly, findings indicate that branch managers who adjust salespersons’ pay-performance sensitivity consistent with the suggestion of agency theory perform better than those who do not make prompt or sufficient adjustments.

Keywords: Risk, Compensation, Pay-performance Sensitivity, Performance

JEL Classification: M49, M52

Suggested Citation

Ho, Joanna L.Y. and Lee, Ling-Chu and Wu, Anne, Employee Compensation Contracts and Firm Performance in Uncertain Environments Empirical Evidence for Adjusting Pay-Performance Sensitivity (July 31, 2009). Available at SSRN: https://ssrn.com/abstract=1441882 or http://dx.doi.org/10.2139/ssrn.1441882

Joanna L.Y. Ho

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States
949-824-4041 (Phone)
949-725-2833 (Fax)

Ling-Chu Lee

National Pingtung Institute of Commerce ( email )

51 Min-Sheng E. Road
Pingtung, Taiwan 900
China

Anne Wu (Contact Author)

National Chengchi University (Taipei) ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

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