Family Firms and Top Management Compensation Incentives

Abstract:     
Family firms comprise more than one third of U.S. public firms. They differ significantly from widely-held firms in their promotion-based tournament environment and agency conflicts. These differences are likely to affect the design and efficacy of compensation incentives. However, most existing studies on executive compensation are based on models of widely-held public firms which focus on aligning the interests of managers with those of dispersed shareholders. Using a sample of S&P 1500 firms, we examine how family ownership, management and control influence the compensation incentives for the top five executives. We find that family firms offer lower tournament incentives to non-CEO executives when the CEO is a member of the founding family, or when there is a family VP as a potential heir. Moreover, tournament incentives exhibit no influence on firm performance in these cases. Family firms offer lower performance-based incentives when there are family executives to facilitate monitoring, and lower risk-taking incentives to non-family executives when the CEO is not a family member and there is a family VP who stands to receive future private benefits. Overall, our results suggest that compensation incentives in family firms and their impact on firm performance are shaped by a tradeoff between lower agency costs and the desire to preserve family control.

Number of Pages in PDF File: 47

Keywords: Family Firms, Executive Compensation, agency theory, Tournament Incentives

JEL Classification: G30, G64, J33

working papers series