In this study I investigate the compensation effects on productivity of Taiwanese firms. In order to motivate their employees to devote efforts to improving firms’ value, Taiwanese companies generally issue cash bonus, stock bonus and employee stock option as the incentive policies. Cash bonus and equity bonus are issued based on the firm performance. Traditional industry companies in Taiwan issue these pay-on-performance bonuses as the incentive policies, while the high-tech industry companies grant employee stock option to motivate employee in maximizing the stock price (the market value of the firm). Studies have shown evidence that those incentive policies would positively help improve firm performance. I employ two methodologies, the Cobb-Douglas production function and Two-stage Adjusted Data Envelopment Analysis to evaluate the impacts of the compensation policy on the productivity of Taiwanese public firms during a period from 1999 to 2003. The respective effects of the three different types of compensation are also evaluated through the two methods. The result suggests that, the cash bonus and equity bonus would have positive effects on the firm productivity, while the employee stock option may not. In addition, I test the effects of corporate governance factors such as managerial ownership, board size and directors compensation, on the firm productivity. The conclusion is that the effects of governance factors on firm productivity vary among different industries.

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