Pay for Outsiders: Compensation Incentives for Nonfamily Executives in Family Firms

Abstract

Motivated by the dual agency environment in founding family firms, we examine how family firms provide compensation incentives to nonfamily executives. Nonfamily executives receive weaker risk-taking incentives and pay-for-performance incentives when family ownership is high and when family members serve as executives or board directors. Family-firm compensation structure does not include tournament incentives when there are family heirs. The influence of family on compensation incentives is stronger than that of nonfamily blockholders. The findings are not driven by differences in executive types, family firms’ reluctance to dilute family ownership, or the family’s decision to exit/remain in the firm.

Keywords: Family Firms, Nonfamily Executives, Executive Compensation

JEL Classification: G30; G32; J33