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

Posted: 11 Dec 2020 Last revised: 4 Feb 2021

See all articles by Zhi Li

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Harley E. Ryan

Georgia State University - Department of Finance

Lingling Wang

University of Connecticut - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: September 15, 2020

Abstract

We use a hand-collected sample of 1,628 S&P 1500 firms and more than 12,000 executives to examine how family firms compensate nonfamily executives. Family firms comprise a large percentage of firms around the world, and most of their executives are not members of the founding family. Moreover, the founding family’s engagement in the firm alters agency conflicts, which in turn should influence the design of incentive compensation. However, there is no empirical evidence on whether and how the incentive compensation of nonfamily executives differs between family and nonfamily firms. Our study intends to fill this gap in the literature. Consistent with our predictions, 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. Our findings suggest that researchers should consider founding-family engagement to avoid misleading inferences with regard to the determinants of incentive compensation, and our findings should help compensation consultants better understand and implement pay packages for family firms and nonfamily firms. The results also imply that uniform compensation regulations intended to improve the monitoring of executives in widely held firms may not be as effective in family firms.

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

JEL Classification: G30, G32, J33, M12

Suggested Citation

Li, Zhi and Ryan, Harley E. and Wang, Lingling, Pay for Outsiders: Incentive Compensation for Nonfamily Executives in Family Firms (September 15, 2020). Contemporary Accounting Research, Forthcoming, University of Connecticut School of Business Research Paper No. 21-01, Available at SSRN: https://ssrn.com/abstract=3741986

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

Harley E. Ryan

Georgia State University - Department of Finance ( email )

University Plaza
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Atlanta, GA 30303-3083
United States
404-651-2674 (Phone)
404-651-2630 (Fax)

Lingling Wang (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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