Pay-to-Accounting Performance and Ownership Structure in Privately-Held Small Corporations

30 Pages Posted: 7 Jan 2001

See all articles by Ken S. Cavalluzzo

Ken S. Cavalluzzo

SVA Plumb Wealth Management, LLC

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Date Written: July 2000

Abstract

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

Cavalluzzo, Ken and Sankaraguruswamy, Srinivasan, Pay-to-Accounting Performance and Ownership Structure in Privately-Held Small Corporations (July 2000). Available at SSRN: https://ssrn.com/abstract=241154 or http://dx.doi.org/10.2139/ssrn.241154

Ken Cavalluzzo (Contact Author)

SVA Plumb Wealth Management, LLC

18650 W Corporate Dr
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Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

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Singapore
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+65 6779 2083 (Fax)

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