Employees’ Pay-Performance Sensitivity and Firm Performance in the Uncertain and Competitive Environment: An Empirical Study of an Auto Dealership

38 Pages Posted: 16 Aug 2010

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: August 16, 2010

Abstract

Agency theory argues that pay-performance sensitivity to agents should be negatively associated with risk; however, some empirical evidence suggests the opposite. While analytical studies do not reach consensus on the relation between competition and pay-performance sensitivity, empirical evidence shows a positive relationship. This study uses a proprietary database of a major auto dealership in Taiwan to provide empirical evidence on how risk and competition affect sensitivity of employee pay to performance and how their congruence shapes firm performance. Our results support the prediction of agency theory that salespersons’ pay-performance sensitivity is negatively associated with risk (i.e., volatility of sales volume). Importantly, branches perform better when managers follow agency theory to adjust salespersons’ pay sensitivity to risk. Additionally, our results show that salespersons’ pay-performance sensitivity increases as competition intensifies; however, such relation does not produce higher firm performance.

JEL Classification: M40, M46

Suggested Citation

Ho, Joanna L.Y. and Lee, Ling-Chu and Wu, Anne, Employees’ Pay-Performance Sensitivity and Firm Performance in the Uncertain and Competitive Environment: An Empirical Study of an Auto Dealership (August 16, 2010). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1660046 or http://dx.doi.org/10.2139/ssrn.1660046

Joanna L.Y. Ho (Contact Author)

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

National Chengchi University (Taipei) ( email )

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

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