Is Inefficient Labor Investment a Failure of Compensation Incentives?—Evidence Based on Contract Reference Point Effect

Abstract

Abstract: With the aging of China’s population, improving the efficiency of enterprise labor investment becomes an important means to optimize the allocation of macroeconomic factors and the competitive advantage of micro enterprises. Using the data of China’s A-share listed companies, this paper empirically examines the impact of the reference point effect of executive compensation contract on the efficiency of enterprise labor investment. It is found that the less the executive compensation benefits compared to the contract reference point, the lower the efficiency of enterprise labor investment, and the above effects mainly exist in the vertical reference point and horizontal reference point dimensions. In addition, compared with the benefit area, the reference point effect of executive compensation contract has a higher impact on the labor investment efficiency in the loss area. Furthermore, the vertical reference point effect of executive compensation is significantly higher than the horizontal reference point effect. Heterogeneity analysis shows that the reference point effect of executive compensation contract is more likely to lead to excessive labor investment than insufficient labor investment. Compared with firms with high labor intensity, the impact of the reference point effect of executive compensation contract is greater in firms with low labor intensity. In addition, a sound supervision mechanism (analyst attention, corporate internal control) and incentive mechanism (executive promotion expectation) can significantly alleviate the above effects. The findings of this paper can provide some management enlightenment for improving the efficiency of enterprise labor investment from the perspective of compensation contract governance.

Key words: executive compensation, contract reference point, labor investment efficiency, loss aversion

Chen Yizao, Chen Yan, Liu Jiazhen, Yue Xinru. Is Inefficient Labor Investment a Failure of Compensation Incentives?—Evidence Based on Contract Reference Point Effect[J]. Management Review, 2024, 36(7): 219-231.

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