How to Pay Non-Family Managers in Large Family Firms: A Principal-Agent Model

Family Business Review, Vol. 24, No. 1, pp. 9-27, 2011

33 Pages Posted: 16 Jan 2010 Last revised: 15 Dec 2011

See all articles by Jorn H. Block

Jorn H. Block

University of Trier - Faculty of Management; Erasmus University Rotterdam (EUR) - Institute of Management (ERIM)

Date Written: January 16, 2010

Abstract

A large number of family firms employ non-family managers. This paper analyzes the optimal compensation contracts of non-family managers employed by family firms using principal-agent analysis. The model shows that the contracts should have low incentive levels in terms of short-term performance measures. This finding is moderated by non-family managers’ responsiveness to incentives, their level of risk aversion, and measurement errors of effort related to short-term performance. The model allows a comparison between the contracts of family and non-family managers. This comparison shows that the contracts of family managers should include relatively greater incentives in terms of short-term performance measures. A number of propositions regarding the compensation of non-family managers employed by family firms are formulated. The implications of the model for family business research and practice are discussed.

Keywords: Family firms, non-family executives, executive pay, executive compensation, multi-task, incentives

JEL Classification: J30, M13, M52

Suggested Citation

Block, Jorn Hendrich, How to Pay Non-Family Managers in Large Family Firms: A Principal-Agent Model (January 16, 2010). Family Business Review, Vol. 24, No. 1, pp. 9-27, 2011, Available at SSRN: https://ssrn.com/abstract=1537539

Jorn Hendrich Block (Contact Author)

University of Trier - Faculty of Management ( email )

D-54296
Germany

Erasmus University Rotterdam (EUR) - Institute of Management (ERIM) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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