Do employee-friendly practices affect executive pay-performance sensitivity? Evidence from corporate annuity systems in China

Leveraging China’s corporate annuity system, a state-guaranteed and employee-friendly practice, we examine its impact on executive pay-performance sensitivity. Our study results show a significant increase in executive pay-performance sensitivity when firms establish an annuity system. Mechanism tests indicate that the optimization of firms’ human capital structure results in increased executive pay-performance sensitivity following the establishment of the annuity system. In cross-sectional analysis, the effect of the annuity system on executive pay-performance sensitivity is more pronounced among high-tech firms and companies with lower financing constraints. We contribute to the research on employee-related corporate governance reforms by elucidating the role of employees in executive compensation contracts, thereby aiding global firms in deepening their positive perceptions of employee-friendly practices.