Pay-to-Accounting Performance and Ownership Structure in Privately-Held Small Corporations
30 Pages Posted: 7 Jan 2001
Date Written: July 2000
We examine the influence of ownership structure on the sensitivity of executive compensation to accounting performance in privately-owned small corporations. We investigate the relation between compensation and several dimensions of accounting-based firm performance including both profits and sales. We find evidence that compensation is sensitive to both measures of accounting performance; however, consistent with interviews from small business owners (Welles, 1995), the dominant relation is with sales. This result is maintained in several sensitivity tests. We also find that firm ownership structure has an important influence on the sensitivity of compensation to accounting performance. Compensation in firms with more concentrated ownership is less responsive to accounting performance than in firms with more disperse ownership. Furthermore, executive compensation is far more sensitive to accounting performance when the manager does not hold shares in the corporation and, to a lesser extent, in non-family owned firms. Taken together, the results suggest that ownership structure plays an important role in the use of accounting information in executive compensation contracts for privately-owned small businesses.
JEL Classification: M41, G32, J33
Suggested Citation: Suggested Citation