Marketization, Labor Redundancy And Compensation-performance Sensitivity

With the continuous development of China's market economy, the separation of ownership and management of modern enterprises makes the incentive plan for executives who control the corporate resources very important. As there is information asymmetry between corporate executives and the owner, so it results in moral hazard, adverse selection and other issues. How to meet interests of the executives and at the same time maximize the value of the enterprise, ultimately achieve a win-win situation, is becoming a primary concern for many scholars.From the perspective of labor redundancy, taking A share state-owned listed companies in Shanghai and Shenzhen Stock Exchange during 1999-2009 as an sample, we first study the impact of the degree of marketization on the size of labor redundancy, and then the economic consequences of labor redundancy:the impact on executives'compensation-performance sensitivity. We find that during the sample period, the higher the degree of marketization, the smaller size of the redundant employees. Besides, unemployment rates and the level of government subordinated also affect the size of labor redundancy. In addition, the existence of labor redundancy decreases executives'compensation-performance sensitivity significantly in state-owned listed companies, making the role of accounting-based performance in evaluating the executives'effort decrease. Therefore the effectiveness of the incentives contract associated with accounting performance depends on theoretical premise. Under the period of Economic Transition, the existence of police burden of state-owned enterprises will make the high sensitivity of the executives' compensation-performance not an optimal choice for the government.Only we speed up the market reforms, on the one hand, the government as the ultimate controller, restrain their administrative intervention on listed stated-owned companies; on the other hand, promoting non-state economic development, fostering the labor market and improving the basis institution for supporting the market economy, such as the social security institution, particularly the unemployment protection institution, then the redundant employees and the policy burden of state-owned enterprises can be released, management compensation contracts can play their role effectively, ultimately corporate governance mechanisms can be improved.