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

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.