We find that institutional investor ownership concentration can increase pay for firm performance sensitivity of non-executive employees using the data of Chinese publicly listed firms. More importantly, this positive effect is not driven by pay for the “luck” component of firm performance and it is stronger when firms have negative earnings. Additionally, this effect is stronger for firms with high intangible asset ratio and in bad legal environments. These findings shed light on the roles of institutional investors in enhancing the efficiency of labor compensation policies.

Keywords: Labor and finance; Institutional investors; Corporate governance; Wages;