Performance-Based Incentives and Their Dual Effects on Employee Retention and Innovation in China’s Electric Vehicle Industry: Evidence from Listed Automotive Firms

Abstract:

The global automotive industry is undergoing a profound transformation driven by electrification, digitalisation, and increasing policy intervention. Within this transition, China has emerged as one of the most dynamic markets for electric vehicles (EVs), supported by robust industrial policies, large-scale investment in battery technologies, and the rapid development of intelligent mobility systems. Chinese EV manufacturers and technology suppliers are becoming increasingly integrated into global automotive value chains and competing both domestically and internationally.
However, this rapid expansion has intensified competition for highly skilled talent, particularly engineers, software developers, and data scientists specialising in battery technologies, autonomous driving systems, and intelligent vehicle platforms. As technological capabilities become a key determinant of industrial competitiveness, firms increasingly rely on performance-based incentive mechanisms to attract, motivate, and retain critical human capital.
Despite their growing importance, the effectiveness of performance-based incentives in high-technology industries remains ambiguous. Existing literature tends to examine incentive outcomes in isolation, with limited attention to the dual, potentially conflicting demands of innovation and retention under rapid technological change, especially in emerging high-velocity sectors such as China’s EV industry. Financial rewards and equity-based compensation are widely used to align employee interests with firm performance, yet excessive incentives may generate unintended consequences such as psychological pressure, employee burnout, and higher turnover. Conversely, insufficient incentives may fail to stimulate innovation or maintain long-term commitment among highly skilled professionals. These tensions are particularly pronounced in China’s EV industry, where firms must sustain rapid technological innovation while preserving organisational stability amid intense market competition and accelerated technological change. This study therefore examines the dual effects of performance-based incentives on employee retention and innovation performance in China’s electric vehicle sector.
The paper addresses the following research question: how can firms design incentive systems that simultaneously promote technological innovation and ensure long-term employee retention in a rapidly evolving industrial environment? To answer this question, the study proposes the Dynamic Incentive Adaptation Model (DIAM). Unlike static incentive frameworks that focus solely on financial alignment, the DIAM conceptualises incentives as a dynamic, context-responsive process that explicitly incorporates organisational culture, technological pace, and employee well-being to resolve tensions between innovation and retention. The model integrates agency theory, which emphasises aligning incentives with organisational objectives; Maslow’s hierarchy of needs, which highlights security, recognition, and professional development alongside financial rewards; and dynamic capability theory, which underscores the need for continuous organisational adaptation to technological and competitive change. Together, these perspectives frame incentive design as a dynamic balancing process among financial motivation, organisational culture, and innovation demands.
Methodologically, the study adopts a mixed-methods approach combining empirical analysis with theoretical modelling. The empirical analysis draws on data from Chinese listed automobile firms operating in the electric vehicle sector. Incentive intensity is measured through compensation structures and equity-based incentive schemes, while employee retention is reflected in workforce stability and turnover indicators. Innovation performance is evaluated using patent activity and R&D investment. Regression analysis examines the nonlinear relationship between incentive intensity and organisational outcomes. The study also incorporates stochastic dominance testing based on cumulative distribution functions to compare alternative incentive structures. A game-theoretical framework models strategic interaction between firms and employees, treating incentive systems as a strategic game in which both actors seek to maximise their respective benefits.
The empirical findings reveal a U-shaped relationship between incentive intensity and employee retention. Extremely high incentives may produce excessive pressure and cultural resistance, increasing turnover. By contrast, moderate incentive levels—approximately within the range of 50 to 80 on the constructed scale—offer a stable balance between motivation and well-being, supporting stronger commitment and career stability. The analysis also indicates that long vesting periods may weaken innovation incentives by reducing the perceived link between effort and reward in fast-changing technological environments. Vesting periods should therefore be dynamically adjusted according to technological development.
Further analysis shows that a positive-sum incentive structure stochastically dominates negative or zero-sum structures, indicating that moderation and transparency yield superior outcomes in value creation and innovation performance. The game-theoretical framework identifies a cooperative Nash equilibrium under moderate incentives and high transparency, where neither firms nor employees have incentives to deviate, supporting sustained collaboration, lower turnover, and stronger innovation spillovers.
This study highlights the role of cultural and institutional factors in shaping incentive effectiveness. In the Chinese context, employees attach considerable importance to job security, organisational belonging, and long-term career development alongside financial rewards. Firms participating in global EV markets must therefore reconcile local workforce expectations with the innovation pressures of international competition. To address this challenge, the study develops a localisation–globalisation dual-track incentive framework that balances culturally embedded employment preferences with internationally competitive innovation objectives.
Overall, this research contributes to the literature on organisational incentives and industrial transformation in the automotive sector. By proposing the Dynamic Incentive Adaptation Model, the study advances a dynamic perspective on incentive design and clarifies how firms can balance innovation and workforce stability during the global electric vehicle transition. These findings offer both theoretical and practical implications: they enrich dynamic theories of organisational incentives and provide actionable guidance for automotive firms seeking to retain core technical talent while sustaining technological innovation in an increasingly competitive global landscape.