CHINA S MANAGERIAL LABOR MARKET hat committed them to meet specified performance indicators, in- cluding profitability. We find that firm performance is again related to managerial incumbency and replacement in predictable ways Of the results of au an experimental reform that was carried out in about 14 percent of es. We also examine the relatio rial compensation and enterprise profits and sales. We show that Chi nese managers'total compensation is positively related to both firm profits and sales and that, after a reform contract, the correlation etween total compensation and profits increased, whereas that be- tween total compensation and sales decreased. Finally, we examine the relationship between the new financial incentives given managers and the productivity of firms. We find that the direct monetary incen tives given managers improved firm productivity and that this im- provement was strengthened by the reforms. In short, we argue that managers were hired, fired, and paid increasingly over the decade of the 1980s in accordance with market-dominated criteria In assessing the managerial reforms, we are examining conse- quences of decisions made by two different sets of agents. One set of decisions is those made by bureaucratic superiors of the firm: (i)deci sions to promote, demote, or transfer a current manager;() the choice of selection method when a new manager is appointed; and (iii)the form of contract to offer the firm that governs the remunera- tion of managers. The other set of decisions is those made by manag ers in response to the incentives provided by the decision rules of eriors The decade of the 1980s in China was a period of remarkable innovation and experimentation in alternative methods of economic reform(see Naughton 1995). Thus our evidence is not that the whole state-owned sector was converted at once or even over the decade from bureaucratic to market-driven managerial appointment meth ods. But by the latter part of the decade, reforms emphasizing market solutions were quite widespread Managerial contracts and auctioning of firms were both broadly implemented for the first time during the latter part of the 1980s. The nature of our evidence does not permit direct comparison between the situation in the late 1980s and the prereform"period before such institutions existed. But we can say that the real allocation of managerial resources displays patterns that we would expect if the reforms were successful. It is reasonable to attribute those patterns to the reform innovations that were intended to produce such an outcome. Overall, the gains from the partial reform of China's state firms are demonstrable. Output per worker rose 67 percent (in constant prices) between 1980 and 1989 for the enterprises in our sample, and