Effect of Employees’ Pay-performance Sensitivity on Future Firm Performance: Evidence from State-owned Listed Enterprises in China over 2007-2015

Taking a balanced panel data consisting of 4365 firm-year observations drawn from the listed state-owned enterprises in Shanghai and Shenzhen Stock Exchange over 2007-2015 as the research sample, the paper examines the effect of the employees’ pay-performance sensitivity (PPS) on the future firm performance from the two competing perspectives of “incentive effect” and “risk-aversion effect”, adopting the method of multiple regression analysis based on OLS and applying the SPSS23 as the data processing tool. Theoretical analysis and empirical results demonstrate that there is a positive link between the employees’ PPS and the future firm performance. To improve the employees’ PPS can stimulate the engagement of the employees, improve their working quality, enrich their workplace innovative behavior, and further lead to higher future firm performance. Meanwhile, the positive effect of the employees’ PPS on the future firm performance is, on average, lower than that of the top executives’ PPS on the future firm performance. Implications of the findings are provided in the end.