Incentivizing the Owner: Why Family Firms offer Pay-for-Performance Contracts to their CEOs

56 Pages Posted: 24 Jul 2019

See all articles by Laura Abrardi

Laura Abrardi

Politecnico di Torino

Laura Rondi

Politecnico di Torino

Date Written: July 23, 2019

Abstract

We study the managers’ compensation schemes adopted by publicly listed family firms by means of a theoretical model and an empirical analysis. Existing empirical literature finds puzzling evidence about the structure of family CEOs’ pay, which apparently contradicts the fundamental tenets of principal-agent theory under moral hazard. In particular, family CEOs typically exhibit lower expected pay but higher pay-for-performance sensitivity than external managers, despite their large inside ownership. In a theoretical model, we show that the outcome-related compensation structure of family CEOs reduces the CEO’s incentive to divert value from minority shareholders. We test the main hypotheses on a panel of Italian listed family firms (2000-2017), for which we have collected data on CEOs’ parental ties, cash and equity-based components of CEOs’ pay and internal corporate governance mechanisms. The evidence confirms our theoretical predictions.

Keywords: CEO pay, diversion, family firms, shareholder protection, family CEO

JEL Classification: J33, G34, M52, D22, L20

Suggested Citation

Abrardi, Laura and Rondi, Laura, Incentivizing the Owner: Why Family Firms offer Pay-for-Performance Contracts to their CEOs (July 23, 2019). Available at SSRN: https://ssrn.com/abstract=3424680 or http://dx.doi.org/10.2139/ssrn.3424680

Laura Abrardi

Politecnico di Torino ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy

Laura Rondi (Contact Author)

Politecnico di Torino ( email )

Department of Management
Corso Duca degli Abruzzi, 24
Torino, 10129
Italy
+39 011 0907232 (Phone)

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