Family Firms and Top Management Compensation Incentives

46 Pages Posted: 21 Mar 2011 Last revised: 24 Aug 2022

See all articles by Zhi Li

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Harley E. Ryan

Georgia State University - Department of Finance

Lingling Wang

University of Connecticut - Department of Finance

Date Written: March 26, 2012

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.

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

JEL Classification: G30, G64, J33

Suggested Citation

Li, Zhi and Ryan, Harley E. and Wang, Lingling, Family Firms and Top Management Compensation Incentives (March 26, 2012). Available at SSRN: https://ssrn.com/abstract=1787430 or http://dx.doi.org/10.2139/ssrn.1787430

Zhi Li (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
35 Broad Street, Suite 1221
Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

Lingling Wang

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
105
Abstract Views
435
rank
367,291
PlumX Metrics