The debate on optimal contracting and managerial power hypotheses continues to rage on. Reeling from frequent extremely-high executive compensation payment, concerns have begun to emerge about the drawbacks of performance-based compensation contracts, whose defects are of great concern from both regulators and researchers. Therefore, those concerned gradually resort to other efficient governance mechanisms. Serving as an alternative mechanism in substituting performance-based compensation contracts, manager market scheme has increasingly gained scholars’ attention. But for ages, owing to the low degree of marketization and scant chance of outside-hiring among state-owned firms and family firms, China’s manager market has undergone the development with a late start and slow step, which is even aggravated by the unbalanced regional economic development and labor market segmentation.

We manually collect the release of talent introduction policies from 24 major cities in China, selecting non-financial A-share listed companies from 2007 to 2019 as the research sample. We aim to explore the impact of talent introduction policies on pay-for-performance sensitivity among local firms and successfully find that pay-for-performance sensitivity significantly decreases following these policies. The above results are robust after using alternative performance measures, adding firm fixed effect, changing policy release definition, considering time trend effect, adding city-level macroeconomic control variables, and deleting tier-one city samples. In further analysis, we test the impact of policies on executive turnover-performance sensitivity, and find that the turnover threat scheme is the main channel the boards utilize under the manager market mechanism. The above results are more pronounced in firms with lower independent director percentage, non-Big 4 auditing and less analyst following.

This paper clarifies that manager market can partially substitute the role performance-based executive compensation contracts play in monitoring and incentivizing executives, adding to the literature on factors that influence executive compensation contracts. Also, the results help to thoroughly understand the economic impact of local talent introduction policies on micro firms, which provides useful evidence for policymakers and capital market participants.