The Impact of Human Capital on Employee Compensation and Pay Performance Sensitivity

More emphasis is put on human capital nowadays and firms are no longer defined only through their physical assets. As the human capital becomes more important, the employees require to be compensated more and the firms need to adopt their compensation contracts to this change in order to survive. In this paper, the findings suggest that compensation contracts in human capital intensive firms differ significantly from those in asset intensive firms. Executives and managers at every level receive higher levels of compensation and they get more of their pay in the form of incentive based compensation in human capital intensive firms. Such difference remains significant at all levels of management, including CEOs, other chiefs, divisional managers, and other managers. However, the largest change belongs to CEO compensation contracts. Further evaluation reveals that the pay performance sensitivity weakens in human capital intensive firms.