Global Knowledge Flows: Impact of Pay Reference Points in a Knowledge-Driven Economy

Conventional compensation studies grounded in agency theory have produced inconclusive findings regarding their influence on employee job performance. In order to resolve this discrepancy, we incorporate prospect theory and reference point theory to introduce the notion of employee pay reference points and their impact on perceptions of fairness and job performance. This study aims to quantify the impact of pay reference points on job performance across three specific dimensions: level, vertical, and current. Furthermore, we investigate whether the existence of knowledge employees influences or regulates this association. To test our hypotheses, we conduct regression analysis on a panel dataset consisting of 25,545 annual records from 3352 firms listed on China A-share market between 2010 and 2020. The findings demonstrate a noteworthy and favorable influence of employee pay reference points on job performance across all three dimensions. Moreover, knowledgeable employees enhance this favorable connection, emphasizing their vital role in maximizing pay-driven motivation. We also detect indications of loss aversion, indicating that employees are more responsive to decreases in pay below their reference point as opposed to increases above it. The findings indicate that using employee pay reference points can be an effective strategic management tool to boost employee motivation and ultimately meet organizational performance goals. Companies can utilize this knowledge to create compensation systems that take into account benchmark values, particularly in industries that rely heavily on knowledge.