Pay for outsiders: Incentive compensation for nonfamily executives in family firms

Abstract

We examine how incentive compensation for nonfamily executives in family firms differs from incentive compensation for executives in nonfamily firms. Nonfamily executives in family firms receive significantly less performance-based pay and equity-based pay. Family monitoring, risk aversion, and a reluctance to dilute family ownership all contribute to the pay differences. Although incentive pay and total pay are lower in family firms, nonfamily executives receive safer pay and enjoy greater job stability. An analysis of executives’ moves across firms suggests that ownership structure, not executives’ preferences, is more likely the driver of pay differences between family and nonfamily firms.

Keywords: Nonfamily Executives in Family Firms, Executive Compensation, Family Monitoring, Risk Aversion, Ownership Dilution

JEL Classification: G30; G32; J33; M12