MHR 6901 ARTICLE REVIEW
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https://doi.org/10.1177/08944865211064410
Family Business Review 2022, Vol. 35(1) 45 –67 © The Author(s) 2021 Article reuse guidelines: sagepub.com/journals-permissions DOI: 10.1177/08944865211064410 journals.sagepub.com/home/fbr
Article
Introduction
To remain competitive, family firms must attract and retain family and nonfamily executives who can help the business succeed. Even though there are several impor- tant human resource management practices that help explain why individuals are attracted to and decide to stay in a firm, executive compensation plays an impor- tant role in the decision to join and stay with a firm (Ensley et al., 2007). In a broad sense, executive com- pensation is a way of measuring and rewarding perfor- mance (de Kok et al., 2006), and it can affect executive decision-making and strategic choices (Finkelstein et al., 2009)—and ultimately the success or failure of the firm. Although research has explored aspects of executive compensation in family businesses, much of our current understanding is nested within the business system (Combs et al., 2020; Odom et al., 2019). This reliance on business factors often results in an “overly simplistic comparisons between family and nonfamily firms” (James et al., 2012, p. 88), and ignores the heterogeneity and complexity of family firms.
Given the importance of executive compensation and the complex nature of family firms, the goals of this
article are to determine what we know about designing and implementing executive compensation in family firms and to explore the role the family system can play in this process. A focus on the importance of the family system allows us to address how the characteristics of the family (e.g., its level of cohesion, shared goals, and shared values) affect the family’s decision-making pro- cesses as well as the structure and the outcomes of exec- utive compensation in the family firm. This knowledge allows us to grasp the complexity of family systems, to consider the impact of the family system on decision- making about the family firm, and to help explain differ- ences in executive compensation policies and practices across family firms. This way, future research can pro- vide additional insights into how business families affect different behaviors in family firms, and how these
1064410 FBRXXX10.1177/08944865211064410Family Business ReviewMichiels et al. research-article2021
1Hasselt University, Diepenbeek, Belgium 2University of Louisville, Louisville, KY, USA 3Florida Atlantic University, Boca Raton, FL, USA
Corresponding Author: Anneleen Michiels, Research Center for Entrepreneurship and Family firms, Hasselt University, Martelarenlaan 42, Hasselt, 3500, Belgium. Email: [email protected]
Toward a Family Science Perspective on Executive Compensation in Family Firms: A Review and Research Agenda
Anneleen Michiels1 , Isabel C. Botero2 , and Roland E. Kidwell3
Abstract In family firms, the family often plays a central role in the strategic decisions of the business. However, until recently, research has primarily focused on exploring the role that business factors play in firm decision-making, with less attention given to the role of the family system. This article reviews the research on executive compensation in family firms to understand whether and how the family system has been considered within this work. Guided by the application of family science theories, we provide a framework to explain why it is important to incorporate the family system in the future study of executive compensation in family firms. We conclude by discussing a research agenda outlining how elements of the family system can be integrated into future executive compensation research to inspire scholars to think differently about this important research topic.
Keywords executive compensation, literature review, family firms, family science
46 Family Business Review 35(1)
behaviors play a role in the compensation of family as well as nonfamily executives.
Guided by the principles of reflexivity and creative synthesis (Alvesson & Sandberg, 2020), we consider this review an “opening up exercise” that enables us to examine and rethink existing literature so as to generate new ways to consider this specific phenomenon. Reflexivity guides us with the following questions:
What may be problematic and constraining in my and, in particular, my research community’s way of thinking about this domain? Are there alternatives that I (we) don’t consider? Can I (we) read literature or talk with people offering an alternative view, providing support in understanding the possible arbitrariness of the way we tend to do research, and produce a specific type of reasoning and results? (Alvesson & Sandberg, 2020, p. 1300)
Then, creative synthesis integrates existing frameworks with insights from the analysis to formulate a new per- spective regarding the topic. By applying these two principles, we hope to direct research on executive compensation in family firms in a way that helps family business owners design compensation practices that reflect the family’s goals and values (Binz Astrachan et al., 2021).
Our review of 71 journal articles about executive compensation in family firms (published between 1983 and 2020) indicates that research in this area is nested in the business system and is studied mainly on the basis of agency theory. Although agency theory-based research highlights family business heterogeneity, it mainly provides a generic, macro-level classification of the firm from a business perspective. Therefore, current research is unable to reveal the more complex heteroge- neity of family firms. As family business research moves to better comprehend the family’s impact on the business, we propose it is important to incorporate fam- ily science theories to understand how and why family characteristics and dynamics play a role in predicting drivers, outcomes, and decision-making processes regarding executive compensation in family firms. Thus, we build on the findings from our literature review to explain why and how family science theories bring to the forefront the family system as a way to understand and capture the multifaceted nature of exec- utive compensation in family firms.
Examining the internal characteristics of business families (e.g., the number of family members involved
in the business, generational stage of the firm, the power exercised by family members, personal dynam- ics among the family and in the firm) and the presence of family and nonfamily executives in the business will likely bring out the heterogeneity of family firms when it comes to executive compensation and invite compari- sons across family firms. These internal characteristics address the diversity and complexity of families and their businesses (Chandler, 2015). They also point to the role that family science theories can play in explain- ing processes and outcomes that help foster and protect the family member goals and the needs of family share- holders and stakeholders. By not considering the family in the development of a family firm’s compensation system, researchers fail to grasp the complexity of the family system.
To provide insights and to guide future inquiry, we developed a family science theoretical framework and a set of key research questions to understand the het- erogeneity of executive compensation across family firms. Such a framework will encourage researchers to advance well beyond comparisons of the “average” family firm to the “average” nonfamily firm regarding executive compensation. Thus, a key contribution of this article is that, based on family science theories, it proposes and explains why and how family variables and relationships should be included in the future study of executive compensation in family firms. Theoretical perspectives in family science move beyond a primarily business orientation to address and explain family interactions. Such a focus can help researchers broaden the methodologies, data collec- tion strategies, and compensation foci (i.e., consider structure or dispersion of pay, not just level). We hope to inspire researchers to think differently about execu- tive compensation in family firms by providing a theo- retical and empircal focus not addressed in previous work on nonfamily executives (Klein & Bell, 2007), nonfamily members in family firms (Tabor et al., 2018), and socioemotional wealth and human resource management in family firms (Cruz et al., 2011).
To achieve our goals, this article is structured the fol- lowing way. First, we discuss the method we employed and the scope of the review about executive compensa- tion in family firms. Next, we report the general charac- teristics of the research and synthesize what we know about executive compensation in family firms in terms of theoretical foundations, level of pay, structure of pay, and pay dispersion. Then, based on family science theories,
Michiels et al. 47
we discuss why and how family factors can influence decisions about executive compensation in family firms. Finally, we advance examples of key research questions for future inquiry.
Method and Scope of the Review
To identify relevant articles to review, we followed the guidelines suggested by Tranfield et al. (2003) and David and Han (2004), which is consistent with previ- ous reviews on family business research (e.g., Andreini et al., 2020; Calabrò et al., 2019; Michiels & Molly, 2017; Qiu & Freel, 2020). Given the high degree of heterogeneity in how executive compensation has been studied, we began the process by choosing to include only published, peer-reviewed, English- language journal articles, thereby excluding unpub- lished work or book chapters. Second, article titles or abstracts had to include terms referring to both family firms and executive compensation. We identified the following keywords to capture the “family entity”: family enterprise, family business, family firm, family SME, family influence, family owner, generation, fam- ily executive, family manager, family TMT, or family CEO. These terms were combined with keywords used to capture the “executive compensation” entity: pay, paid, salary, compensation, incentive, bonus, remu- neration, LTIP, stock option. We searched for the com- bination of an executive compensation entity and a family business entity in the title and/or the abstract of articles that were published in print or online through August 2020.
First, we scanned the major outlets for family busi- ness and executive compensation research individually by manually checking the indexes. Following the approach of Daspit et al. (2018), we searched 34 promi- nent journals in finance, management, and economics. Similar to Tabor et al. (2018), we added journals with a specific family business focus to this list (i.e., Journal of Family Business Strategy and Journal of Family Business Management). For the specific focus of this review article, we also added prominent journals in the area of human resource management (i.e., Human Resource Management, Human Resource Management Journal, Human Resource Management Review).
Subsequently, we broadened our search by entering the abovementioned search terms in three databases: EBSCO Host Business Source Complete, ProQuest
Central, and Elsevier ScienceDirect. Finally, we queried researchers from the fields of family business, organiza- tional behavior, and human resources management via three different listservs to see if they were aware of any other (forthcoming) articles relating to executive com- pensation in family businesses. For an article to be retained, authors needed to include executive compensa- tion as an important construct or variable within the paper. Otherwise, the article was removed from consid- eration. Using the method and criteria described above, a total of 71 articles, published in 48 different journals comprise the basis for our review.
To analyze these studies, we used an excel data extraction sheet in which we coded descriptive elements (e.g., authors, journal, theories used, sample, methodol- ogy, and measures), the research question, main results, and important notes for each article. Table 1 provides an overview of all studies included in this review.
Executive Compensation in Family Firms: A Review
We now describe the extant research regarding execu- tive compensation in family firms. First, we briefly discuss the general characteristics of the studies in the review followed by the major theoretical approaches taken in previous research and their limitations. Then, we summarize key findings related to executive com- pensation in the level of pay, the structure of pay and pay dispersion family firms, and the limitations of current research. In brief, we found that research in the family business field—similar to general execu- tive compensation studies (see Edmans et al., 2017 for a comprehensive overview)—mainly considered three basic issues regarding compensation. The first group of studies focused on understanding the factors related to the amount of pay that executives receive (i.e., level of pay). The second group of studies explored the structure of the compensation packages that family firms used for family and nonfamily exec- utives (i.e., structure). The third group of articles focused on the study of pay dispersion among execu- tives. After summarizing these findings, we describe the accomplishments and shortcomings of extant research and use reflexivity and creative synthesis to set the stage for advancing a family science theoreti- cal framework in which to center future research on executive compensation.
48
T ab
le 1
. Pa
pe rs
I nc
lu de
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t he
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re nt
R ev
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.
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ce T
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11 )
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70 0
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t he
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th an
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s in
gl e-
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k an
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20 15
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ge nc
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1, 53
2 pu
bl ic
U .S
. f ir
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at iv
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ro pe
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ch c
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’s d
iv id
en d
in co
m e
re la
ti ve
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t o ta
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m pe
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io n
w as
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at iv
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d H
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(2 01
8) A
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57 7
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fir m
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l C EO
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it h
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ay t
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id el
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ld
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nn in
gs (
19 98
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14 3
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t o ta
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pe ns
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as e
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as a
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er
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ns (
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ce rt
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th eo
ry 17
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ro lle
d fir
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en ds
t o p
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s to
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iv es
m o re
.
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ro ne
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20 08
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na l f
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ha t
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ve ra
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f to
p 5)
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f am
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d fa
m ily
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w ne
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r to
ta l e
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p ay
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ily o
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p is
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ss o ci
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; h o w
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( o pt
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ce pt
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20 17
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fir m
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13 )
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t he
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ls o n
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to h
ig he
r pe
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s (o
n al
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el s:
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es
m an
ag er
s, o
th er
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nd a
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a l.
(2 01
4) A
ge nc
y th
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( pr
in ci
pa l- ag
en t;
co
nt ro
lli ng
-m in
o ri
ty )
6, 38
7 fir
m -y
ea r
o bs
er va
ti o ns
f ro
m
pu bl
ic T
ai w
an es
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m s
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T p
ay s
tr uc
tu re
; c as
h bo
nu s
FF s
o ffe
r a
lo w
er p
ro po
rt io
n o f va
ri ab
le c
o m
pe ns
at io
n to
t o ta
l c o m
pe ns
at io
n to
t he
ir T
M T
t ha
n N
FB . F
Fs
w it
h ce
nt ra
l a ge
nc y
pr o bl
em s
pr o vi
de t
he ir
T M
T w
it h
hi gh
er p
ro po
rt io
ns o
f ca
sh c
o m
pe ns
at io
n th
an F
Fs
w it
ho ut
c en
tr al
a ge
nc y
pr o bl
em s.
C he
n et
a l.
(2 01
6) A
ge nc
y th
eo ry
, s te
w ar
ds hi
p th
eo ry
, u pp
er e
ch el
o ns
t he
o ry
17 3
ex ec
ut iv
es f ro
m
pu bl
ic T
ai w
an es
e fir
m s
Pe rc
ei ve
d pa
y pr
em iu
m
(e xp
er im
en t)
H ig
h ex
ec ut
iv e
co m
pe ns
at io
n in
flu en
ce s
th e
in cu
m be
nt C
EO ’s
p er
ce pt
io n
ab o ut
a p
ro fe
ss io
na l m
an ag
er ’s
de
gr ee
o f st
ew ar
ds hi
p, w
hi ch
is a
k ey
f ac
to r
be hi
nd t
he C
EO s
uc ce
ss io
n de
ci si
o n.
C he
n an
d C
hu (
20 20
) A
ge nc
y th
eo ry
, h um
an c
ap it
al
th eo
ry 5,
21 5
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic T
ai w
an es
e fir
m s
C EO
p ay
( sa
la ry
/b o nu
s) T
he r
el at
io ns
hi p
be tw
ee n
C EO
c o m
pe ns
at io
n an
d C
EO a
bi lit
y is
m uc
h st
ro ng
er in
t he
p re
se nc
e o f be
tt er
co
m pe
ns at
io n
co m
m it
te es
in F
Fs w
it h
no nf
am ily
C EO
s, b
ut t
hi s
re la
ti o ns
hi p
do es
n o t
ex is
t in
F Fs
w it
h fa
m ily
C EO
s. C
he ng
a nd
F ir
th (
20 06
) A
ge nc
y th
eo ry
33 6
pu bl
ic H
o ng
K o ng
fir
m s
C EO
p ay
, a ve
ra ge
e xe
cu ti
ve
di re
ct o rs
p ay
; c o m
pe ns
at io
n o f
to p
fiv e
em pl
o ye
es ; b
o nu
s pe
r ex
ec ut
iv e;
b o nu
s as
% o
f pa
y
Fo un
d no
e vi
de nc
e th
at d
ir ec
to rs
u se
t he
p o w
er t
ha t
co m
es f ro
m h
ig h
st o ck
o w
ne rs
hi p
to a
w ar
d hi
gh
co m
pe ns
at io
n to
t he
m se
lv es
.
C he
ng e
t al
. ( 20
15 )
A ge
nc y
th eo
ry 73
4 pu
bl ic
C hi
ne se
f ir
m s
T o ta
l e xe
cu ti
ve c
as h
co m
pe ns
at io
n Fa
m ily
o w
ne rs
hi p
is p
o si
ti ve
ly a
ss o ci
at ed
w it
h to
ta l e
xe cu
ti ve
c o m
pe ns
at io
n. G
o ve
rn an
ce f ac
to rs
a ffe
ct
ho w
d iff
er en
t fa
m ily
o w
ne rs
hi p
st ru
ct ur
es in
flu en
ce c
o m
pe ns
at io
n co
nt ra
ct s.
C he
o ng
a nd
K im
( 20
19 )
N o s
pe ci
fic t
he o ry
30 4
K o re
an f am
ily f ir
m s
T o ta
l e xe
cu ti
ve p
ay Fa
m ily
e xe
cu ti
ve s
re ce
iv e
hi gh
er c
o m
pe ns
at io
n th
an n
o nf
am ily
e xe
cu ti
ve s
in b
us in
es s
gr o up
f ir
m s.
T he
pa
y o ffe
re d
to f am
ily e
xe cu
ti ve
s te
nd s
to b
e hi
gh w
he n
th e
pr o po
rt io
n o f sh
ar es
h el
d by
o th
er f am
ily
m em
be rs
is lo
w .
(c on
tin ue
d)
49
So ur
ce T
he o re
ti ca
l f ra
m ew
o rk
Sa m
pl e
Pa y
m ea
su re
s K
ey f in
di ng
s
C he
un g
et a
l. (2
00 5)
A ge
nc y
th eo
ry 41
2 pu
bl ic
H o ng
K o ng
fir
m s
Le ve
l o f to
ta l p
ay f o r
C EO
a nd
C
ha ir
m an
T he
s m
al le
r th
e fir
m , t
he m
o re
li ke
ly it
is f o r
o w
ne r-
m an
ag er
s to
u se
t he
ir o
w ne
rs hi
p ri
gh ts
t o e
xt ra
ct
hi gh
er c
as h
sa la
ri es
f o r
th em
se lv
es .
C ho
ur o u
(2 01
0) A
ge nc
y th
eo ry
16 7
pu bl
ic C
an ad
ia n
fir m
s C
EO t
o ta
l c as
h co
m pe
ns at
io n
O w
ne r
C EO
s in
F Fs
r ec
ei ve
h ig
he r
le ve
ls o
f co
m pe
ns at
io n
th an
n o no
w ne
r C
EO s
w he
n vo
ti ng
r ig
ht s
an d
ca sh
f lo
w r
ig ht
s di
ve rg
e. C
hr is
m an
e t
al . (
20 07
) A
ge nc
y th
eo ry
, s te
w ar
ds hi
p th
eo ry
20 8
pr iv
at e
U .S
. f ir
m s
In ce
nt iv
e co
m pe
ns at
io n
FF s
m o ni
to r
fa m
ily m
an ag
er s
an d
co m
pe ns
at e
th em
w it
h in
ce nt
iv es
t o a
la rg
e ex
te nt
. T he
u se
o f in
ce nt
iv e
co m
pe ns
at io
n re
su lt
s in
b et
te r
fir m
p er
fo rm
an ce
. C
hr is
m an
e t
al . (
20 14
) B
o un
de d
ra ti
o na
lit y
C on
ce pt
ua l
N A
B ui
ld a
c o nc
ep tu
al f ra
m ew
o rk
t o e
xp la
in w
hy f am
ily -c
en te
re d
no ne
co no
m ic
g o al
s an
d bo
un de
d ra
ti o na
lit y
de cr
ea se
t he
w ill
in gn
es s
an d
ab ili
ty o
f FF
t o h
ir e
an d
pr o vi
de c
o m
pe ti
ti ve
c o m
pe ns
at io
n to
n o nf
am ily
m
an ag
er s
ev en
if t
ho se
m an
ag er
s ar
e m
o re
t al
en te
d th
an a
va ila
bl e
fa m
ily m
an ag
er s
an d
th e
la bo
r m
ar ke
t is
c o m
po se
d o f st
ew ar
ds r
at he
r th
an a
ge nt
s. C
hu a
et a
l. (2
00 9)
A ge
nc y
th eo
ry C on
ce pt
ua l
N A
B ui
ld s
co nc
ep tu
al m
o de
l o f m
an ag
er ia
l c o m
pe ns
at io
n th
at p
re di
ct s
fa vo
ra bl
e co
m pe
ns at
io n
tr ea
tm en
t fo
r fa
m ily
m an
ag er
o ve
r no
nf am
ily m
an ag
er s.
C o he
n an
d La
ut er
ba ch
( 20
08 )
A ge
nc y
th eo
ry , m
an ag
er ia
l di
sc re
ti o n
ap pr
o ac
h,
ex pl
o it
at io
n ap
pr o ac
h
12 4
pu bl
ic I sr
ae li
fir m
s T
o ta
l C EO
p ay
T he
m ea
n pa
y o f o w
ne r
C EO
s in
F Fs
is a
lm o st
id en
ti ca
l t o t
he m
ea n
pa y
o f C
EO s
in p
ar tn
er sh
ip f ir
m s.
C o m
bs e
t al
. ( 20
10 )
A ge
nc y
th eo
ry 38
1 pu
bl ic
U .S
. f ir
m s
C EO
t o ta
l c as
h co
m pe
ns at
io n;
st
o ck
o pt
io ns
D iff
er en
ce s
in C
EO p
ay c
an b
e pa
rt ia
lly a
tt ri
bu te
d to
h o w
f am
ily is
r ep
re se
nt ed
a m
o ng
la rg
e pu
bl ic
f ir
m s.
Fa
m ily
C EO
s in
f ir
m s
w it
h m
ul ti
pl e
fa m
ily m
em be
rs t
ak e
le ss
c o m
pe ns
at io
n th
an C
EO s
in N
FB s.
C EO
s at
f am
ily f ir
m s
w it
ho ut
m ul
ti pl
e fa
m ily
m em
be rs
h av
e hi
gh er
c o m
pe ns
at io
n pa
ck ag
es .
C ro
ci e
t al
. ( 20
12 )
M an
ag er
ia l p
o w
er t
he o ry
, o pt
im al
c o nt
ra ct
in g
th eo
ry 3,
73 1
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic f ir
m s
fr o m
14
c o un
tr ie
s in
C
o nt
in en
ta l E
ur o pe
T o ta
l C EO
p ay
le ve
l; C
EO p
ay
st ru
ct ur
e (e
qu it
y ra
ti o )
In st
it ut
io na
l o w
ne rs
hi p
is a
ss o ci
at ed
w it
h hi
gh er
le ve
ls o
f C
EO c
as h
an d
to ta
l c o m
pe ns
at io
n in
F Fs
. T he
y al
so in
cr ea
se t
he u
se o
f eq
ui ty
-b as
ed c
o m
pe ns
at io
n bo
th in
F Fs
a nd
N FF
s.
C ui
e t
al . (
20 18
) B
eh av
io ra
l a ge
nc y
m o de
l 2,
95 0
pu bl
ic U
.S . f
ir m
s C
EO ’s
lo ng
-t er
m in
ce nt
iv es
FF s
te nd
t o p
ro vi
de a
h ig
he r
le ve
l o f lo
ng -t
er m
in ce
nt iv
es t
o n
o nf
am ily
C EO
s th
an f am
ily C
EO s.
I n
ad di
ti o n,
lo ng
-t er
m in
ce nt
iv es
s tr
o ng
ly m
o ti
va te
C EO
s to
im pr
o ve
f ir
m s’
C SR
p er
fo rm
an ce
, r eg
ar dl
es s
o f th
ei r
fa m
ily m
em be
rs hi
ps .
D e
C es
ar i e
t al
. ( 20
16 )
A ge
nc y
th eo
ry 76
0 pr
iv at
e fir
m s
fr o m
C
o nt
in en
ta l E
ur o pe
T o ta
l C EO
c o m
pe ns
at io
n; C
EO
ca sh
c o m
pe ns
at io
n C
EO s
o f FF
s ha
ve lo
w er
le ve
ls o
f to
ta l c
o m
pe ns
at io
n, b
ut t
he y
do n
o t
ha ve
lo w
er c
as h
co m
pe ns
at io
n.
N o nf
am ily
C EO
s ar
e m
o re
a bl
e to
e xp
lo it
a n
ac qu
is it
io n
to in
cr ea
se t
he ir
c o m
pe ns
at io
n af
te r
th e
ac qu
is it
io n.
D re
ss le
r an
d T
au er
( 20
15 )
So ci
o em
o ti
o na
l w ea
lt h
(S EW
);
ag en
cy t
he o ry
23 0
pu bl
ic a
nd p
ri va
te
U .S
. f ir
m s
M ar
ke t
sa la
ry e
st im
at es
; i m
pl ie
d co
m pe
ns at
io n
es ti
m at
e M
ar ke
t co
m pe
ns at
io n
re tu
rn s
fo r
hi re
d fa
rm m
an ag
er s
w er
e co
m pa
re d
w it
h th
e es
ti m
at ed
im pl
ie d
co m
pe ns
at io
n m
an ag
er r
et ur
ns f o r
fa m
ily m
an ag
er s.
En sl
ey e
t al
. ( 20
07 )
Eq ui
ty t
he o ry
; t o ur
na m
en t
th eo
ry 20
0 pr
iv at
e U
.S . f
ir m
s Pa
y di
sp er
si o n
in T
M T
Pa y
di sp
er si
o n
cr ea
te s
ne ga
ti ve
b eh
av io
ra l c
o ns
eq ue
nc es
in f am
ily t
ea m
s w
he re
g ro
up d
yn am
ic s
ar e
m o re
co
m pl
ic at
ed . N
o nf
am ily
T M
T m
em be
rs r
es po
nd m
o re
p o si
ti ve
ly t
o lo
ng -t
er m
p ay
d is
pe rs
io n.
Fa rr
el l a
nd W
in te
rs (
20 08
) N
o t
th eo
ry d
ri ve
n bu
t ag
en cy
th
eo ry
is m
en ti
o ne
d 1,
82 5
pr iv
at e
U .S
. f ir
m s
T o ta
l s al
ar y
pa id
t o a
ll to
p ex
ec ut
iv es
T he
a ut
ho rs
f in
d a
ne ga
ti ve
r el
at io
n be
tw ee
n ex
ec ut
iv e
sa la
ri es
a nd
f ir
m s
w it
h gr
ea te
r th
an 5
0% f am
ily
o w
ne rs
hi p.
G al
le go
a nd
L ar
ra in
( 20
12 )
N o s
pe ci
fic t
he o ry
1, 64
8 ex
ec ut
iv es
f ro
m
pu bl
ic a
nd p
ri va
te f ir
m s
fr o m
A rg
en ti
na , B
ra zi
l, an
d C
hi le
T o ta
l C EO
c o m
pe ns
at io
n Pr
o fe
ss io
na l C
EO s
in F
Fs m
ak e
ar o un
d 30
% m
o re
t ha
n C
EO s
in o
th er
f ir
m s.
G iv
en t
ha t
th ei
r sa
m pl
e in
cl ud
es o
nl y
no nf
am ily
C EO
s, t
he f am
ily p
re m
iu m
is n
o t
a m
ec ha
ni ca
l r es
ul t
o f ne
po ti
sm .
G o h
et a
l. (2
01 6)
N o ne
t ha
t ar
e cl
ea r
15 2
pu bl
ic F
re nc
h fir
m s
D is
cl o su
re o
f st
o ck
o pt
io ns
FF s
ar e
le ss
li ke
ly t
o d
is cl
o se
in fo
rm at
io n
o n
st o ck
o pt
io n
ex pe
ns es
t ha
n N
FF s.
G ra
bk e-
R un
de ll
an d
G o m
ez -
M ej
ia (
20 02
) A
ge nc
y th
eo ry
, r es
o ur
ce
de pe
nd en
cy t
he o ry
C on
ce pt
ua l
N A
C EO
’s (
fa m
ily )
st o ck
o w
ne rs
hi p
is e
xp ec
te d
to h
av e
a po
si ti
ve e
ffe ct
o n
th e
le ve
l o f C
EO p
ay .
G ra
zi an
o a
nd R
o nd
i ( 20
21 )
A ge
nc y
th eo
ry 1,
09 2
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic I ta
lia n
fir m
s
V ar
ia bl
e sh
ar e
o f C
EO p
ay t
o
to ta
l C EO
p ay
Fa m
ily C
EO s’
v ar
ia bl
e pa
y is
lo w
er t
ha n
no nf
am ily
C EO
s’ v
ar ia
bl e
pa y
in in
du st
ri es
w he
re im
po rt
pe
ne tr
at io
n is
h ig
h, p
ro du
ct s
ar e
di ffe
re nt
ia te
d, o
r do
m es
ti c
co nf
ig ur
at io
n is
h ig
h.
H si
eh e
t al
. ( 20
19 )
A ge
nc y
th eo
ry 1,
27 1
fir m
-y ea
r o bs
er va
ti o ns
f o r
79
fir m
s
C EO
p ay
( ca
sh p
ay , e
qu it
y- ba
se d
pa y,
a nd
t o ta
l c o m
pe ns
at io
n) Im
m ig
ra nt
-f o un
de r
FF s
co m
pe ns
at e
th ei
r C
EO s
w it
h hi
gh er
e qu
it y-
ba se
d pa
y th
an im
m ig
ra nt
-f o un
de r
N Fs
.
(c on
tin ue
d)
T ab
le 1
. (c
o n
ti n
u e d
)
50
So ur
ce T
he o re
ti ca
l f ra
m ew
o rk
Sa m
pl e
Pa y
m ea
su re
s K
ey f in
di ng
s
Ja m
es e
t al
. ( 20
17 )
A ge
nc y
th eo
ry ; s
te w
ar ds
hi p
th eo
ry 39
8 C
an ad
ia n
fir m
s U
se o
f pe
rf o rm
an ce
-b as
ed p
ay N
o nf
am ily
m an
ag er
s ar
e si
gn ifi
ca nt
ly le
ss li
ke ly
t o b
e re
m un
er at
ed w
it h
pe rf
o rm
an ce
-b as
ed p
ay o
r sh
ar e
o w
ne rs
hi p
th an
f am
ily m
an ag
er s.
Ja sk
ie w
ic z,
B lo
ck , C
o m
bs , a
nd
M ill
er (
20 17
) A
ge nc
y th
eo ry
; s ig
na lin
g th
eo ry
33 5
pu bl
ic U
.S . f
ir m
s C
EO in
ce nt
iv e
co m
pe ns
at io
n Fa
m ily
o w
ne rs
u se
m o re
C EO
in ce
nt iv
es a
nd m
o re
e ffe
ct iv
el y
ti e
th em
t o f ir
m p
er fo
rm an
ce t
ha n
fo un
de r
o w
ne rs
. Ja
sk ie
w ic
z, B
lo ck
, M ill
er , a
nd
C o m
bs (
20 17
) A
ge nc
y th
eo ry
; S EW
35 8
pu bl
ic U
.S . f
ir m
s T
M T
p ay
d is
pe rs
io n
(e xc
l. C
EO )
Fa m
ily o
w ne
rs hi
p is
m o re
p o si
ti ve
ly r
el at
ed t
o T
M T
p ay
d is
pe rs
io n
th an
f o un
de r
o w
ne rs
hi p.
L at
er
ge ne
ra ti
o n
fa m
ily o
w ne
rs a
re n
eg at
iv el
y re
la te
d to
T M
T p
ay d
is pe
rs io
n. Jo
ng a
nd H
o (
20 19
) A
ge nc
y th
eo ry
27 9
pu bl
ic M
al ay
si an
f ir
m s
Le ve
l o f to
ta l e
xe cu
ti ve
co
m pe
ns at
io n
Fa m
ily o
w ne
rs hi
p is
p o si
ti ve
ly r
el at
ed t
o e
xe cu
ti ve
c o m
pe ns
at io
n.
K im
a nd
H an
( 20
18 )
M an
ag er
ia l p
o w
er t
he o ry
67 0
pu bl
ic K
o re
an f ir
m s
T o ta
l C EO
p ay
Fa m
ily C
EO s
in F
Fs d
o r
ec ei
ve h
ig he
r to
ta l C
EO c
o m
pe ns
at io
n th
an n
o nf
am ily
C EO
s in
f am
ily f ir
m s.
T he
pa
y- fo
r- pe
rf o rm
an ce
s en
si ti
vi ty
is lo
w er
f o r
fa m
ily C
EO s
in F
Fs t
ha n
no nf
am ily
C EO
s in
F Fs
a nd
C EO
s in
N FF
s. G
o m
ez -M
ej ia
e t
al . (
20 03
) A
ge nc
y th
eo ry
25 3
pu bl
ic U
.S . f
ir m
s Le
ve l o
f to
ta l C
EO c
o m
pe ns
at io
n Fa
m ily
C EO
s re
ce iv
e lo
w er
t o ta
l p ay
t ha
n pr
o fe
ss io
na l m
an ag
er s.
P ay
d is
ad va
nt ag
e in
cr ea
se s
as t
he f am
ily
o w
ne rs
hi p
po si
ti o n
im pr
o ve
s. A
lt ho
ug h
fa m
ily C
EO s
te nd
t o e
ar n
le ss
, t he
y ar
e co
m pe
ns at
ed f o r
as su
m in
g gr
ea te
r un
co nt
ro lla
bl e
ri sk
. La
m a
nd L
ee (
20 12
) A
ge nc
y th
eo ry
34 6
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic H
o ng
K o ng
f ir
m s
R em
un er
at io
n co
m m
it te
e (d
um m
y) Fa
m ily
o w
ne rs
hi p
ha s
an a
dv er
se e
ffe ct
o n
th e
re la
ti o n
be tw
ee n
th e
re m
un er
at io
n co
m m
it te
e an
d fir
m
pe rf
o rm
an ce
.
La ns
be rg
( 19
83 )
N o s
pe ci
fic t
he o ry
C on
ce pt
ua l
N A
Ex ch
an ge
o f re
so ur
ce s
is g
o ve
rn ed
b y
af fe
ct iv
e pr
in ci
pl es
, n ee
ds , a
nd c
ar e
ab o ut
lo ng
-t er
m w
el l- be
in g
o f
o th
er s,
n o t
ju st
t he
v al
ue o
f go
o ds
a nd
s er
vi ce
s be
in g
ex ch
an ge
d G
o m
ez -M
ej ia
e t
al . (
20 19
) B
eh av
io ra
l a ge
nc y
m o de
l 1,
63 6
pu bl
ic U
.S . f
ir m
s St
o ck
o pt
io ns
W hi
le t
he d
es ig
n o f th
e co
m pe
ns at
io n
pa ck
ag e
o f FF
s an
d N
FF s
is v
er y
si m
ila r,
t he
o bs
er ve
d ef
fe ct
o f C
EO
in ce
nt iv
es o
n ri
sk -t
ak in
g is
p ra
ct ic
al ly
n il
fo r
FF s.
T hu
s, t
he m
o ni
to ri
ng a
dv an
ta ge
c o m
bi ne
d w
it h
th e
ad di
ti o na
l s o ci
o em
o ti
o na
l r is
k be
ar in
g o f fa
m ily
p ri
nc ip
al s
ap pe
ar s
to n
eg at
e th
e ef
fe ct
o f C
EO o
pt io
n in
ce nt
iv es
o n
ri sk
-t ak
in g
in F
Fs . W
it hi
n FF
s, f am
ily C
EO s
w ill
b e
le ss
in cl
in ed
t o m
ak e
eg o ce
nt ri
c, h
ig he
r ri
sk s
tr at
eg ic
d ec
is io
ns a
im ed
a t
in cr
ea si
ng t
he ir
p ro
sp ec
ti ve
o pt
io n
w ea
lt h.
M az
ur a
nd W
u (2
01 6)
A ge
nc y
th eo
ry 36
2 pu
bl ic
U .S
. f ir
m s
C EO
c o m
pe ns
at io
n st
ru ct
ur e
N FF
s ad
o pt
h ig
he r
va lu
e en
ha nc
in g
pa y
in ce
nt iv
es t
ha n
FF s.
M cC
o na
ug hy
( 20
00 )
Fa m
ily in
ce nt
iv e
al ig
nm en
t hy
po th
es is
; a ge
nc y
th eo
ry 82
p ub
lic U
.S . f
ir m
s Le
ve l o
f to
ta l C
EO c
o m
pe ns
at io
n Fa
m ily
C EO
s re
ce iv
e le
ss p
ay a
nd t
he ir
c o m
pe ns
at io
n is
le ss
s en
si ti
ve t
o f ir
m p
er fo
rm an
ce t
ha n
no nf
am ily
m
em be
r C
EO s
M em
ili e
t al
. ( 20
13 )
SE W
20 19
p ri
va te
U .S
. f ir
m s
In ce
nt iv
es f o r
no nf
am ily
m
an ag
er s
(d um
m y)
Fa m
ily in
flu en
ce a
nd c
o nt
ro l,
an d
in tr
af am
ily t
ra ns
ge ne
ra ti
o na
l s uc
ce ss
io n
in te
nt io
ns a
re n
eg at
iv el
y re
la te
d to
t he
p ro
pe ns
it y
to u
se in
ce nt
iv es
. T he
in te
ra ct
io n
ef fe
ct s
o f fa
m ily
m an
ag em
en t
an d
o w
ne rs
hi p
re du
ce
th e
pr o pe
ns it
y to
u se
in ce
nt iv
e. M
ic hi
el s
et a
l. (2
01 3)
A ge
nc y
(o pt
im al
c o nt
ra ct
in g)
52 9
pr iv
at e
U .S
. f ir
m s
T o ta
l C EO
c o m
pe ns
at io
n O
bj ec
ti ve
p er
fo rm
an ce
-b as
ed m
ea su
re s
pl ay
a s
ig ni
fic an
t ro
le in
C EO
c o m
pe ns
at io
n. C
EO c
o m
pe ns
at io
n is
m o re
r es
po ns
iv e
to f ir
m p
er fo
rm an
ce in
f ir
m s
w it
h lo
w o
w ne
rs hi
p di
sp er
si o n
an d
in t
he c
o nt
ro lli
ng
o w
ne r
st ag
e. T
he p
ay -f
o r-
pe rf
o rm
an ce
r el
at io
n is
s lig
ht ly
s tr
o ng
er f o r
no nf
am ily
C EO
s th
an f o r
fa m
ily
C EO
s. N
av ar
ro a
nd A
ns ó n
(2 00
9) A
ge nc
y th
eo ry
13 2
pu bl
ic f ir
m s
R em
un er
at io
n co
m m
it te
e Fa
m ily
f ir
m s
m ak
e le
ss u
se o
f re
m un
er at
io n
co m
m it
te es
t ha
n no
nf am
ily f ir
m s.
N ya
nt ak
yi (
20 16
) N
o ne
t ha
t ar
e cl
ea r
13 5
pu bl
ic a
nd p
ri va
te
A fr
ic an
f ir
m s
T o ta
l C EO
c o m
pe ns
at io
n W
hi le
f am
ily m
an ag
er s
re ce
iv e
hi gh
er p
er fo
rm an
ce -b
as ed
c o m
pe ns
at io
n th
an n
o nf
am ily
m an
ag er
s, t
he ir
co
m pe
ns at
io n
is le
ss s
en si
ti ve
t o f ir
m p
er fo
rm an
ce .
Pa gl
ia ru
ss i a
nd C
o st
a (2
01 7)
A ge
nc y
th eo
ry ; i
de nt
it y
th eo
ry C on
ce pt
ua l
N A
T he
p re
se nc
e o f fa
m ily
t ie
s be
tw ee
n pr
in ci
pa l a
nd a
ge nt
c ha
ng es
t he
o pt
im al
in ce
nt iv
e co
nt ra
ct
pa ra
m et
er s.
Pa te
l a nd
C o o pe
r (2
01 4)
Po w
er d
is tr
ib ut
io ns
; s tr
uc tu
ra l
po w
er ; T
M T
d yn
am ic
s 1,
93 4
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic U
.S . f
ir m
s
C o m
pe ns
at io
n eq
ua lit
y be
tw ee
n T
M T
m em
be rs
G re
at er
e qu
al it
y in
s tr
uc tu
ra l p
o w
er (
e. g.
, c o m
pe ns
at io
n) a
cr o ss
f am
ily a
nd n
o nf
am ily
T M
T m
em be
rs
in cr
ea se
s pe
rf o rm
an ce
in F
Fs . T
hi s
re la
ti o n
is s
tr o ng
er u
nd er
in cr
ea si
ng e
nv ir
o nm
en ta
l d yn
am is
m a
nd
hi gh
er g
o ve
rn an
ce p
er fo
rm an
ce , b
ut w
ea ke
r un
de r
th e
pr es
en ce
o f a
fo un
de r
C EO
. Pe
rr y
et a
l. (2
01 3)
N o ne
t ha
t ar
e cl
ea r
60 5
pu bl
ic a
nd p
ri va
te
fir m
s C
o m
pe ns
at io
n pr
ac ti
ce s
Fa m
ily in
flu en
ce s
ig ni
fic an
tl y
pr ed
ic ts
c o m
pe ns
at io
n pr
ef er
en ce
. C o m
pe ns
at io
n pr
ac ti
ce s
ar e
ne ga
ti ve
ly
re la
te d
to t
he F
F o w
ne r’
s as
se ss
m en
t o f th
ei r
bu si
ne ss
e th
ic al
s tr
in ge
nc y.
Po o se
r et
a l.
(2 01
7) St
ew ar
ds hi
p th
eo ry
; a ge
nc y
th eo
ry 86
p ub
lic U
.S . f
ir m
s T
o ta
l C EO
c o m
pe ns
at io
n le
ve l
an d
st ru
ct ur
e FF
s ha
ve lo
w er
c ur
re nt
C EO
c o m
pe ns
at io
n an
d lo
w er
f o rw
ar d
C EO
c o m
pe ns
at io
n in
c o m
pa ri
so n
w it
h N
FF s.
(c on
tin ue
d)
T ab
le 1
. (c
o n
ti n
u e d
)
51
So ur
ce T
he o re
ti ca
l f ra
m ew
o rk
Sa m
pl e
Pa y
m ea
su re
s K
ey f in
di ng
s
R am
as w
am y
et a
l. (2
00 0)
H um
an c
ap it
al t
he o ry
, c o rp
o ra
te
go ve
rn an
ce t
he o ry
15 0
pu bl
ic I nd
ia n
fir m
s Le
ve l o
f to
ta l C
EO c
o m
pe ns
at io
n In
cr ea
si ng
le ve
ls o
f fa
m ily
o w
ne rs
hi p
de cr
ea se
t he
in ci
de nc
e o f m
an ag
er ia
l o pp
o rt
un is
m , r
ed uc
in g
th e
in ci
de nc
e o f ex
ce ss
iv e
C EO
c o m
pe ns
at io
n Sc
hu lz
e et
a l.
(2 00
3) A
ge nc
y th
eo ry
, t he
o ry
o f th
e ho
us eh
o ld
, a lt
ru is
m t
he o ry
88 3
pr iv
at e
U .S
. f ir
m s
V ar
ia bl
e pa
y fo
r fa
m ily
m em
be rs
(d
um m
y) Id
en ti
fie s
ci rc
um st
an ce
s in
w hi
ch a
lt ru
is m
m o de
ra te
s th
e in
flu en
ce o
f pa
y in
ce nt
iv es
o n
th e
pe rf
o rm
an ce
o f FF
s. Sh
ar m
a an
d H
ua ng
( 20
14 )
N o s
pe ci
fic t
he o ry
14 ,0
73 f ir
m -y
ea r
o bs
er va
ti o ns
f ro
m
pu bl
ic U
.S . f
ir m
s
Pa y
di sp
er si
o n
Fa m
ily o
w ne
rs hi
p in
cr ea
se s
th e
lik el
ih o o d
o f C
EO n
o t
be in
g th
e hi
gh es
t pa
id m
an ag
er .
Sp ec
kb ac
he r
an d
W en
tg es
(2
01 2)
R es
o ur
ce -b
as ed
v ie
w 30
4 G
er m
an a
nd A
us tr
ia n
pu bl
ic a
nd p
ri va
te f ir
m s
In ce
nt iv
es f o r
T M
T (
du m
m y)
T he
u se
o f in
ce nt
iv e
co nt
ra ct
is lo
w er
in F
Fs . I
nv o lv
em en
t o f fo
un di
ng f am
ily m
em be
rs in
t he
T M
T is
as
so ci
at ed
w it
h m
ak in
g le
ss u
se o
f in
ce nt
iv e
co nt
ra ct
s fo
r m
an ag
er s.
T an
g (2
01 4)
A ge
nc y
(o pt
im al
c o nt
ra ct
in g)
; m
an ag
er ia
l p o w
er 1,
58 2
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic U
.S . f
ir m
s
T o ta
l C EO
c o m
pe ns
at io
n; C
EO
st o ck
o pt
io n
gr an
ts St
o ck
o pt
io n
gr an
ts t
o n
o nf
am ily
C EO
s in
F Fs
d ec
re as
ed a
ft er
t he
p as
sa ge
o f SO
X . N
FF s
gr an
te d
si gn
ifi ca
nt ly
m o re
s to
ck o
pt io
ns t
ha n
FF s
be fo
re S
O X
, b ut
n o t
af te
r it
s pa
ss ag
e.
T in
ai ka
r (2
01 4)
A ge
nc y
th eo
ry 21
0 pu
bl ic
U .S
. f ir
m s
T o ta
l C EO
c o m
pe ns
at io
n; e
xc es
s co
m pe
ns at
io n
N FF
s ha
ve m
o re
e xc
es s
C EO
c o m
pe ns
at io
n th
an F
Fs .
T is
ci ni
a nd
R ao
li (2
01 3)
Id io
sy nc
ra ti
c pr
iv at
e be
ne fit
s ap
pr o ac
h 23
5 pu
bl ic
I ta
lia n
fir m
s St
o ck
o pt
io n
pl an
s (d
um m
y) T
he li
ke lih
o o d
o f SO
P in
cr ea
se s
w it
h hi
gh er
in vo
lv em
en t
o f ke
y fa
m ily
m em
be rs
in t
he g
o ve
rn an
ce o
f a
fir m
. T
sa o e
t al
. ( 20
15 )
A ge
nc y
th eo
ry 2,
18 3
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic T
ai w
an es
e fir
m s
T o ta
l C EO
c o m
pe ns
at io
n FF
s po
si ti
ve ly
m o de
ra te
t he
r el
at io
n be
tw ee
n R
& D
in ve
st m
en t
an d
C EO
c o m
pe ns
at io
n. C
EO
co m
pe ns
at io
n is
le ss
s en
si ti
ve t
o e
xp lic
it p
er fo
rm an
ce m
ea su
re s
in F
Fs w
he n
co m
pa re
d w
it h
N FF
s.
Y ar
ra m
a nd
A da
pa (
20 20
) A
ge nc
y th
eo ry
82 1
fir m
-y ea
r o bs
er va
ti o ns
f ro
m
pu bl
ic A
us tr
al ia
n fir
m s
T o ta
l C EO
c o m
pe ns
at io
n FF
s ha
ve lo
w er
le ve
ls o
f C
EO p
ay t
ha n
N FF
s.
V el
iy at
h an
d R
am as
w am
y (2
00 0)
So ci
al e
m be
dd ed
ne ss
t he
o ry
12 2
pu bl
ic I nd
ia n
fir m
s T
o ta
l C EO
c o m
pe ns
at io
n Fa
m ily
s ha
re ho
ld in
gs a
nd t
he p
er ce
nt ag
e o f fa
m ily
d ir
ec to
rs o
n th
e bo
ar d
ar e
pr ed
o m
in an
t in
flu en
ce s
o n
C EO
p ay
. W
an g
et a
l. (2
02 0)
A ge
nc y
th eo
ry 14
,1 52
p ub
lic T
ai w
an es
e fir
m s
A ve
ra ge
m an
ag er
ia l p
ay A
ve ra
ge d
ir ec
to r
pa y
Py ra
m id
al o
w ne
rs hi
p an
d hi
gh er
c o nt
ro l- o w
ne rs
hi p
de vi
at io
n re
du ce
s ex
ec ut
iv e
co m
pe ns
at io
n in
F F.
W u
an d
M az
ur (
20 18
) In
fo rm
at io
n as
ym m
et ry
, q -t
he o ry
o f in
ve st
m en
t, r
is k
av er
si o n
1, 75
6 pu
bl ic
U .S
. f ir
m s
C EO
in ce
nt iv
e pa
y Pa
y in
ce nt
iv es
in F
Fs a
re n
o t
as so
ci at
ed w
it h
ca pi
ta l e
xp en
di tu
re s.
F am
ily C
EO in
ce nt
iv e
pa y
m an
ife st
s th
e fa
m ily
p re
fe re
nc e
fo r
lo w
er r
is k,
e sp
ec ia
lly in
f ir
m s
w it
h hi
gh er
f ir
m r
is k.
Y o un
g an
d T
sa i (
20 08
) So
ci al
n et
w o rk
t he
o ry
31 4
pu bl
ic T
ai w
an es
e fir
m s
T o ta
l C EO
p ay
T he
p ay
o f fa
m ily
C EO
s is
le ss
s en
si ti
ve t
o t
he C
EO s
so ci
al c
ap it
al t
ha n
th at
o f no
nf am
ily C
EO s.
Y u
et a
l. (2
02 0)
Ev o lu
ti o na
ry p
sy ch
o lo
gy t
he o ry
, SE
W 42
1 pu
bl ic
C hi
ne se
f ir
m s
N o nf
am ily
e xe
cu ti
ve s
al ar
y (s
al ar
y +
b o nu
s +
a llo
w an
ce )
FF s
w it
h di
st an
t ki
ns hi
p ti
es a
re m
o re
li ke
ly t
o p
ay n
o nf
am ily
e xe
cu ti
ve s
lo w
er s
al ar
ie s,
c o m
pa re
d w
it h
FF s
w it
h cl
o se
k in
sh ip
t ie
s. T
hi s
re la
ti o n
is m
o de
ra te
d by
f ir
m p
er fo
rm an
ce a
nd f am
ily o
w ne
rs hi
p.
N ot
e. F
F =
f am
ily f ir
m s;
N FF
= n
o nf
am ily
f ir
m s;
C EO
= c
hi ef
e xe
cu ti
ve o
ffi ce
r; T
M T
= t
o p
m an
ag em
en t
te am
; S M
Es =
s m
al l- a
nd m
ed iu
m -s
iz ed
e nt
er pr
is es
; C SR
= c
o rp
o ra
te s
o ci
al r
es po
ns ib
ili ty
; S O
X =
Sa
rb an
es -O
xl ey
; S O
P =
s ha
re o
pt io
n pl
an .
T ab
le 1
. (c
o n
ti n
u e d
)
52 Family Business Review 35(1)
General Characteristics of the Studies in the Review
The body of articles about executive compensation in family firms began in 1983 with the work of Lansberg on the institutional overlap in family firms and its effects on human resource management. However, interest in the topic truly emerged in the 2000 to 2010 decade and grew exponentially in the past decade. The studies have been published in journals from a variety of disciplines including management, finance, econom- ics, human resource management (HRM), strategy, and organizational behavior. Only eight articles included in the review were published in family business journals: five articles in Family Business Review, one in Journal of Family Business Strategy, and two in Journal of Family Business Management. The method employed in the research articles was either quantitative (87%) or theoretical (13%). None of the articles used a qualita- tive method. About 85% of the empirical studies explored executive compensation in publicly traded firms and most of them were single country studies. Interestingly, a third of the studies did not provide a clear definition of “family business” and did not pro- vide any information regarding how family firms were identified in their samples.
Theoretical Foundations
Although our review identified a dozen theoretical frameworks used to develop hypotheses and predictions in the study of executive compensation in family firms (see Column 2 in Table 1), the vast majority of the arti- cles heavily relied on agency theory as the theoretical framework for their predictions. Agency theory (Jensen & Meckling, 1976) focuses on the divergent interests and risk incentives of the owners of an enterprise (i.e., principals) versus its managers (i.e., agents), and assumes that compensation is an efficient means to effectively monitor and align the interests of owners and managers to reduce conflicts. Agency theory research in family firms generally assumes that family firm leaders are overly generous with family member employees in terms of compensation, promotions, and other rewards, regardless of qualifications.
Three general hypotheses about executive compensa- tion have been explored using agency theory. First, the optimal contract approach or incentive alignment hypothesis suggests that executive compensation is
designed to minimize agency costs (Aggarwal & Samwick, 1999; Demski & Feltham, 1978). From this perspective, the compensation of nonfamily executives or executives in nonfamily firms should be higher than family executives or family firms (i.e., assuming that family firms are family managed) because family execu- tives/family firms have lower agency conflicts when compared with nonfamily executives/firms. Second, the rent extraction/incentive alignment hypothesis (Bebchuk et al., 2002) argues that given that senior managers con- trol the pay setting process, executives in family firms will be more likely to compensate themselves better (i.e., in excess) in comparison with nonfamily execu- tives and executives in nonfamily firms. The third hypothesis is the idiosyncratic private benefits hypothe- sis (Tiscini & Raoli, 2013), which argues that the extent to which family executives bring resources that are key for the success of the firm should increase the compen- sation that they receive.
Whereas a few studies have relied on stewardship, socioemotional wealth, and other theoretical approaches, which broaden the study of executive compensation in family firms by introducing additional assumptions, the overarching emphasis on agency theory potentially lim- its our understanding of this phenomenon by nesting it in the business system of the family firm. This is prob- lematic because agency theory assumptions do not take into account the complexity of families and family firms (cf. Boyd & Solarino, 2016; Eisenhardt, 1989), and lead researchers to focus on general descriptive factors as the primary drivers of executive compensation in family firms with less emphasis on other internal factors that could play a very relevant role in the process. After we summarize and analyze the extant research, we propose a family science theoretical perspective in which to study executive compensation in family firms. As noted, such a perspective will increase the ability to capture the heterogeneity of executive compensation strategies across different types of family firms.
Level of Pay
Most studies included in the review focused on under- standing the factors related to the level (or total amount) of pay that executives receive and most of them try to understand whether family firms pay their executives less or more than nonfamily firms. As discussed, the vast majority of these studies rely on agency theory to build their arguments. Results are mixed. Some studies
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support the long-standing view that CEO (chief execu- tive officer) pay in family firms is lower due to the atten- uation of the principal-agent problem (e.g., De Cesari et al., 2016; Pooser et al., 2017; Tinaikar, 2014; Yarram & Adapa, 2020). Others find that family ownership leads to higher executive pay levels, due to higher con- trolling-minority agency problems (e.g., Basu et al., 2007; Bhabra & Hossain, 2018; M. Cheng et al., 2015).
These mixed findings could have several causes. First, these studies mainly use a dummy variable as a measure of family businesses, thereby ignoring the het- erogeneity of family firms. Given that differences among family businesses may be as large as, or even larger than, the differences between family and nonfa- mily businesses (Chua et al., 2012), these mixed find- ings are not surprising. Second, the employed definition for what constitutes a family firm widely varies, with ownership cutoff percentages of the owning family ranging from 5% (e.g., M. Cheng et al., 2015) to 25% (e.g., De Cesari et al., 2016), or 20% ownership of “insiders and employees” (Yarram & Adapa, 2020). Third, the measure of “total compensation” also widely varies across studies (see Table 1): inclusion or exclu- sion of dividend income, stock options, benefits, cash salary, long-term incentives, short-term incentives, and so on. This prevents us from comparing results and drawing conclusions from them.
Within family businesses, some researchers have investigated compensation differences between family and nonfamily executives. Again, results are mixed. Several empirical findings support the extraction theory, which suggests that family executives use their power to extract private benefits such as excessive compensation, thereby exploiting the firm and its outside shareholders (e.g., Cai et al., 2013; Cheong & Kim, 2019; Jong & Ho, 2019; Kim & Han, 2018). However, some studies find evidence for the family incentive alignment hypotheses, which assumes that family executives have superior incentives for maximizing firm value and are unlikely to act against the interests of the firm, thereby needing lower compensation levels and less incentive-based compensation (Gomez-Mejia et al., 2003; McConaughy, 2000). Again, widely varying measures of what consti- tutes “pay level” prevent us from drawing conclusions on whether family executives earn more or less than nonfamily executives in the family firm.
Apart from comparing family executives with nonfa- mily executives, researchers have started to explore the differences within family firms by incorporating
variables such as family representation in management and board (Combs et al., 2010) or presence of the founder (Barontini & Bozzi, 2018). Yet, until now, research has failed to acknowledge the role of the family system as driver, moderator, or outcome of incentive compensation, with the notable exception of Yu and col- leagues (2020), who investigated the impact of kinship ties.
Structure of Pay
A second group of studies explored the structure of the compensation packages that family firms used. These focused on how compensation packages are devel- oped, what types of incentives are likely to be offered to executives in family firms or the proportion of vari- able pay in the compensation package, and what the consequences are. Most studies agree that family busi- nesses make less use of incentive contracts (Baek & Fazio, 2015; Memili et al., 2013; Speckbacher & Wentges, 2012) and have lower levels of incentive pay (Baek & Fazio, 2015; Bhabra & Hossain, 2018; Mazur & Wu, 2016; McConaughy, 2000; Tsao et al., 2015) when compared with nonfamily businesses. These results are generally explained through the higher agency costs in nonfamily firms due to severe owner- manager conflicts.
Few studies have investigated the differences of pay structures between family and nonfamily executives within family businesses. In contrast to traditional agency predictions, studies by Chrisman et al. (2007) and Michiels et al. (2013) confirm that privately held family businesses do use incentive compensation for their family executives, arguing that incentive compen- sation mitigates agency problems in private family firms.
Other findings indicate that family businesses tend to provide higher levels of performance-related incentive pay to nonfamily executives as compared with family executives (M. Cheng et al., 2015; Cui et al., 2018; Kim & Han, 2018; McConaughy, 2000; Michiels et al., 2013). This can be explained in two different ways. First, given that family businesses are more likely to keep stock ownership within the family, they make more use of cash incentives to recruit, retain, and motivate nonfamily executives (Carlson et al., 2006). Second, given that family executives are inherently motivated by the prospect of socioemotional wealth preservation (Cui et al., 2018), they might need less incentive pay than
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nonfamily executives. Finally, the only study investigat- ing the outcomes of incentive compensation within fam- ily firms is that of Gomez-Mejia and colleagues (2019), who find that a CEO’s ties to the family influence his or her response to incentive compensation.
Thus, the majority of papers investigating executive pay structure focus on the difference between family and nonfamily firms. Although a few papers address the heterogeneity of family businesses by considering dif- ferences between family and nonfamily executives, the role of the family is absent in the current debate.
Pay Dispersion
Finally, a few studies focused on the issue of pay disper- sion. Pay dispersion reflects the difference between the compensation level of individuals, and can be from the CEO down (i.e., vertical dispersion) or between mem- bers of the top management team (i.e., horizontal disper- sion). Findings indicate that family ownership increases the likelihood of the CEO not being the highest paid manager (Sharma & Huang, 2014), and that the use of TMT (top management team) pay dispersion declines across generations (Jaskiewicz, Block, Miller, & Combs, 2017). Research shows that executive pay dispersion can have different outcomes for family than for nonfamily firms. In particular, Ensley and colleagues (2007) find that pay dispersion within the TMT creates strong nega- tive behavioral consequences, especially in family firm TMTs, where group dynamics are more complicated. They also find that the close relationship between family members makes these teams more vulnerable to the neg- ative impact of pay dispersion, as already proposed by Lansberg in his 1983 conceptual paper. Finally, Patel and Cooper (2014) find that pay dispersion among family and nonfamily executives harms firm performance.
With the exception of Ensley et al. (2007), all studies on pay dispersion rely on data from public U.S. firms, and current research again does not consider the role of family dynamics and its potential impact on pay disper- sion across family firms.
Theories, Methods, and Unanswered Questions: Reflexivity
As mentioned above, our review is guided by reflexivity and creative synthesis (Alvesson & Sandberg, 2020). This exercise involves identifying and analyzing what may be constraining the family business research community’s
way of thinking about the domain of executive compensa- tion and the availability of alternative approaches that extant research does not fully consider. Our inquiry leads us to use insights from this analysis and existing research frameworks to advance a new perspective to study the topic of executive compensation in family firms.
In general, family business research has evolved in distinct ways over the past decade (Sharma et al., 2019). There are movements away from studies that simply compare family with nonfamily firms (Payne, 2018), and away from a dominant focus on financial perfor- mance as the main motivation of family firm behavior (Gomez-Mejia et al., 2011). There is a movement toward family and individual-level variables as causal factors to predict or explain firm-level behaviors (Sharma et al., 2019). Yet, our review reveals that research on executive compensation in family businesses has not followed this trend. Many studies still focus on the differences in CEO compensation between the “average” family firm and the “average” nonfamily firm. The studies predomi- nantly rely on agency theory assumptions, and have been largely reluctant to consider the role of the business family in formulating and implementing executive com- pensation in the family firm.
Up to now, executive compensation research in fam- ily firms emphasized topics such as level of CEO pay and antecedents of executive compensation. Less promi- nence was afforded to decision-making processes, out- comes, and a consideration of specific countries and types of family firms when exploring executive com- pensation as well as family dynamics. Although the findings thus far are informative, they are mainly rooted in agency theory, such that data are collected in a way that overlooks family and family member influence. To move forward, we should go beyond comparing family with nonfamily firms by exploring other aspects of executive compensation within family firms. To do this, alternative theories are needed to better explain the influence the family can have on executive compensa- tion, and other aspects that have not been explored.
Guided by our review findings, we propose that more diverse theoretical perspectives will add a richness to the study of family firm executive compensation. A the- oretical grounding in family science can help guide a new research emphasis. Theoretical perspectives in fam- ily science move beyond a primarily business orienta- tion to address and explain family interactions. Such a focus will also help researchers broaden the methodolo- gies, data collection strategies, and compensation foci
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(i.e., consider structure or dispersion of pay, not just level). Given the multiple instances of mixed results observed in our review, we align with Boyd and Solarino (2016, p. 1297) who argue that “. . . inconsistent findings could mean that (a) researchers are not asking the right questions (i.e., theory development issues) or (b) the questions themselves are appropriate but are not being studied in an optimal matter (i.e., research design issues).” Therefore, we can integrate past findings with different theoretical perspectives to address some of the unresolved issues in executive compensation across the family business literature.
Business-related theories often are used to explain how families engage in business decision-making (James et al., 2012). As the application of business the- ory in family business research increases, a decrease in the use of family science theory to explain family busi- ness phenomena has led to unsophisticated compari- sons of family firms to nonfamily firms (Combs et al., 2020; James et al., 2012). Building on the arguments of others (e.g., Jaskiewicz, Combs, et al., 2017), we sug- gest that incorporating family science theoretical per- spectives can provide more complete theoretical models and an increased understanding of family influences on various aspects of executive compensation across fam- ily firms. Jaskiewicz and colleagues (Jaskiewicz, Combs, Shanine and Kacmar, 2017) discussed several prominent family science theories and their potential usefulness, impact, and implications on management research generally and family firm research specifi- cally. These theories posit that early (and ongoing) interactions and relationships in families have implica- tions for current and future behavior of family members and influence what occurs within a family business. For example, some family firms are systematic in designing executive compensation plans, while in others, adverse outcomes result because a plan is not designed at all.
Incorporating Family Science Theories: Creative Synthesis
As indicated by our review, the vast majority of studies were framed with a single theoretical perspective, and agency theory was by far the dominant approach. However, it is neither new nor novel to say that “agency theory presents a partial view of the world, that, although it is valid, also ignores a good bit of the complexity of organizations. Additional perspectives can help to cap- ture the greater complexity” (Eisenhardt, 1989, p. 71).
Thus, to engage in creative synthesis by rethinking existing literature in ways that generate new ways of thinking (Alvesson & Sandberg, 2020), we introduce family science theories by offering research questions addressing how elements of the family system may pre- dict and/or moderate relationships found in previous research and provide increased understanding of execu- tive compensation in family firms.
The three-circle model of the family business (Tagiuri & Davis, 1996) proposes that three interde- pendent groups make up the family business system: family, business, and ownership. Examining one of those subsystems, the family, implies a discussion of family systems theory, a subset of general systems the- ory (Broderick, 1993). Family systems theory posits that the family is an open, complex, and hierarchical system in which established values, rules, and rituals guide the family’s interactions. This theory focuses on how the family interacts and the behaviors resulting from members’ efforts to maintain system boundaries by removing elements threatening the rules governing the system and its relationship with internal and exter- nal environments.
Attitudes, behaviors, norms, and roles in an extended family system may instill each family member with a strong family orientation and cohesiveness rooted in the family (Bacallao & Smokowski, 2007). The family sys- tem can also incubate and support entrepreneurial activi- ties among family members (Jaskiewicz et al., 2015; Zellweger et al., 2011), perhaps affecting a family mem- ber’s capability and desire to engage in varying levels of risk-taking. However, the overlap between family and business boundaries could also lead to problems with role ambiguity and role conflict for family members. Thus, the system can encourage family members to engage in highly positive as well as highly negative behaviors in an effort to maintain the system’s stability (Kidwell et al., 2019). Examining executive compensa- tion in family firms in light of the role of the family sys- tem could therefore provide additional insight into how family businesses make decisions about the compensa- tion of family executives as well as nonfamily execu- tives. It may also help researchers better understand the reasons for previous mixed results in the literature. For better or for worse, elements of the family system such as family orientation, harmony and communication norms, cohesiveness, and levels of risk-taking, role ambiguity, and role conflict among its members may tell us more about the family’s decision-making processes,
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the structure, and the outcomes of executive compensa- tion in the family firm. Yet virtually no research to date has investigated these issues. Alternatively, family ele- ments themselves might also be affected by executive compensation decisions. Within the intergenerational family firm, as we explain below, the effects of these elements of the family system can be influenced by fam- ily/family member characteristics, including sibling birth order, parenting style, kinship ties, stage in the family life cycle, and patterns of communication. With these factors in mind, we see gaps in at least three gen- eral areas:
1. In family firms, what impact do family system elements (i.e., family members’ attitudes, behav- iors, norms, and roles) have on executive com- pensation decisions?
2. In family firms, how do executive compensation decisions affect interactions and behaviors within the family system (i.e., levels and types of cohesion, conflict, communication among fam- ily members)?
3. In family firms, how do family system character- istics moderate relations between the drivers of
executive compensation and the executive com- pensation decisions on the level, structure, and dispersion? And how do family system charac- teristics moderate relations between executive compensation decisions and organizational/fam- ily/individual outcomes (e.g., firm performance, top management team dynamics and perfor- mance, individual behavior and attitudes, and changes to elements of the family system)?
Figure 1 outlines a general framework for future research by incorporating the general research questions provided above to the previous research focus. The fol- lowing discourse integrates and applies family systems and family characteristics drawn from several family science theories that are relevant to the study of execu- tive compensation in family firms. After considering recent studies that focused on the application of family science theories to management and family business research (Combs et al., 2020; Jaskiewicz, Combs, Shanine, & Kacmar, 2017), we identified six family sci- ence theories that we believe are better suited to be lev- eraged for the study of executive compensation across family firms. These include the family-niche model of
Figure 1 Future Research on Executive Compensation in Family Firms
Michiels et al. 57
birth order and personality, parental control theory, evo- lutionary psychology theory, kinship theory, family development theory, and family communication patterns theory. We provide a series of novel and significant examples of potential research questions based on the family science theories that are particularly relevant in guiding future research on family firm executive com- pensation. These research question examples are linked to the appropriate family science theory in Table 2 and further explained below.
The family-niche model of birth order and personal- ity proposes that factors such as the biological composi- tion of the family, birth intervals, and personality differences in families influence a child’s personality development (Paulhus et al., 1999; Sulloway, 1996). Tests of this model found that first-born children are more responsible and achievement-oriented than other siblings, whereas later-borns are more socially success- ful than their older siblings. In addition, younger chil- dren may become lazy and spoiled as they do not face the threat of the traumatic experience of being “dethroned” by a second sibling’s birth (Sulloway, 1996). The model indicates that a competition may occur among the children to find the proper niche to pro- vide them with access to parental resources. Research indicates that first-born children try to please their par- ents by being responsible and becoming conscientious adults, whereas later-born children develop an empathic adult character that can result in rebellion (Paulhus et al., 1999; Sulloway, 1996). Although much research has been undertaken using the model and how it applies to personality development, it is useful to consider its implications for executive compensation. For example, CEO birth order is positively associated with strategic risk-taking—with birth order effects being driven by sibling rivalry (Campbell et al., 2019). Previous research has found that family members in different TMTs within a family firm are paid differently and that this difference declines across generations (Jaskiewicz, Block, Miller, & Combs, 2017). Given that later-born children are more empathetic than first-born children, who also tend to be less demanding, we suggest that differences in birth order may affect how a family member negotiates compensation as an executive of the family firm. Thus, researchers might ask How does birth order affect the relationship between a family member’s position in the TMT and his or her level of executive compensation in family firms? (Research question example [RQE1]).
This theoretical framework could also be used to explore whether there are different drivers in the execu- tive compensation of family and nonfamily executives, and how they affect compensation across family firms. After all, some families are characterized by fairness norms that promote the fulfillment of family needs and equality between family members, and others are not. And in business, the prevalent norm is reward based on merit. In this context, it would be important to explore whether position in the family (i.e., older child, younger child) plays a role in how compensation is determined for family members, and the nature of that role. Exploring whether these family characteristics matter in determining executive compensation would address recent calls to better understand the importance of the family system in the family business (Frank et al., 2017; Zachary, 2011). At the same time, it would provide more insights into the performance outcomes of pay disper- sion in different types of family firms, which is still a black box. Thus, researchers could address the follow- ing by applying the family-niche model of birth order and personality: How do birth order and the degree of fairness norms within the family system relate to the establishment of an executive compensation system that is perceived as equitable by family and nonfamily execu- tives? (RQE2), and how do perceptions of equity in the executive compensation of family members of the TMT relate to firm and TMT performance? (RQE3).
Higher pay dispersion in TMTs influences team dynamics (Ensley et al., 2007). In particular, the higher the dispersion, the greater potential for affective and cognitive conflict, the lower the cohesion of the team, and the lower the effectiveness of the team. As noted, birth order potentially influences an individual’s dispo- sition. When family top management teams of siblings are composed of a wide difference in age, such diversity is likely to enhance the negative effects of team disper- sion by creating more conflict due to the age differences between members. Drawing on the family-niche model of birth order and personality, scholars could gain fur- ther insights by asking How does birth order composi- tion of the TMT moderate the relationship between pay dispersion and team dynamics in the family firm? (RQE4).
Parental control theory identified three dominant par- enting styles (authoritarian, authoritative, and permis- sive) and found that each of the parents’ styles had a different impact on the characteristics of their children
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(Baumrind, 1967, 1971) in terms of self-reliance, con- trol, contentment, and trust. Parenting style not only affects how children behave as adults, but—in addition to the family’s social environment—it has implications for how the children would behave relative to others in the family and the family firm. In summary, authorita- tive (demanding, yet warm) parenting generally leads to self-reliant, self-controlled, and content children, whereas authoritarian parents—detached, controlling and less warm than other parents—have children who are relatively discontent, withdrawn, and distrustful. Finally, the children of permissive parents (neither demanding nor controlling but relatively warm) are the least self-reliant, explorative, and self-controlled (Baumrind, 1971).
The family-niche model of birth order combined with parental control theory may help guide the study of how the best fit between compensation structure and the
executive is determined. For example, our review indi- cated that very little is known concerning the anteced- ents and consequences of pay dispersion within the family firm TMT. These theories could therefore also be used to explore pay dispersion within family firm top management teams consisting of siblings and children raised by parents with different parenting styles. The mix of first- and later-born children and parenting style may affect the effectiveness of the TMT. Teams com- posed of all later-born siblings may possess higher lev- els of openness to experience that allows them to effectively manage ambiguity (Healey & Ellis, 2007). Teams composed of all first-born siblings from across different family units may suffer because their higher levels of conscientiousness and their desire to seek orderliness rather than accept ambiguity may result in all of them maneuvering to be the leader. In mixed teams, first-born siblings may attempt to create order
Table 2. Sample Research Questions.
# Research question examples (RQE) Theoretical framework
1 How does birth order affect the relationship between a family member’s position in the TMT and his/her level of executive compensation in family firms?
The family-niche model of birth order and personality (Sulloway, 1996)
2 How do birth order and the degree of fairness norms within the family system relate to the establishment of an executive compensation system that is perceived as equitable by family and nonfamily executives?
3 How do perceptions of equity in the executive compensation of family members of the TMT relate to firm and TMT performance?
4 How does birth order composition of the TMT moderate the relationship between pay dispersion and team dynamics in the family firm?
5 How does the mix of first- and later-born children in the family firm’s TMT moderate the relationship between TMT pay dispersion and its outcomes? Parental control theory
(Baumrind, 1967, 1971)
6 How does the dominant parenting style (authoritarian, authoritative, permissive) experienced by team members who are offspring of the previous generation affect the outcomes of TMT pay dispersion?
7 How does the degree of kinship ties between family members in the dominant family coalition moderate the relationship between the selection and type of executive in the team (family vs. nonfamily) and the level of pay received?
Evolutionary psychology theory and kinship theory (Stewart, 2003)8 How do kinship ties of family members moderate the relationship between pay fairness
perceptions of family members and their degree of stewardship toward the firm?
9 How is the relationship between incentive-based compensation and business risk-taking by the family CEO moderated by the current stage and norms of the CEO’s family life cycle?
Family development theory (Duvall, 1988)
10 Is the relation between executive compensation as a source of extrinsic motivation and the sense of accomplishment associated with attaining its individual-level outcomes as an intrinsic reward moderated by elements of the family system (such as cohesion, family communication patterns, and flexibility)?
Family communications patterns theory (Ritchie & Fitzpatrick, 1990)
CEO = chief executive officer; TMT = top management team.
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that later-born siblings resist. Children whose parents displayed authoritarian parenting styles may be less trustful of the structure and mechanisms of the executive compensation scheme, while those raised by authorita- tive parents may possess an achievement orientation that fits well with a merit-based compensation system. The composition of the sibling (or cousin) TMT may thus have a strong impact on the actual outcome of TMT pay dispersion in terms of firm-level (e.g., firm perfor- mance), team-level (e.g., team performance), and indi- vidual-level outcomes (e.g., justice perceptions) Applying the family-niche model of birth order com- bined with parental control theory, scholars may seek to answer questions such as How does the mix of first- and later-born children in the family firm’s TMT moderate the relationship between TMT pay dispersion and its outcomes? (RQE5), and How does the dominant parent- ing style (authoritarian, authoritative, permissive) expe- rienced by team members who are offspring of the previous generation affect the outcomes of TMT pay dis- persion? (RQE6). Multitheoretic studies could use vari- ous theoretical perspectives (e.g., family science and more traditional theories such as agency theory) for building individual hypotheses, or to see which theoreti- cal perspectives have greater explanatory power (Boyd & Solarino, 2016). For example, the interaction of birth order and personality with parenting style on executive compensation might be contrasted in future research with predictions emanating from tournament theory (Ensley et al., 2007; Lazear & Rosen, 1981) and equity theory (Deutsch, 1985) in the use of merit-based execu- tive compensation among teams of siblings and the competition for high performance within the TMT.
Evolutionary psychology theory and kinship theory provide family-oriented frames in which to examine the diversity of families that own and operate businesses and to study executive compensation across family firms (Yu et al., 2020). The biological view of kinship ties goes well beyond the close connections of spouses, children, and siblings to consider more distant kin such as cousins, aunts, uncles, in-laws, grandparents, and grandchildren (Stewart, 2003). Evolutionary theory pos- its that the importance of kinship ties in the family firm assists in understanding how a family’s identity con- nects to the firm, the level of diverse interests between close kin and distant relatives, and how these interests interact (Nicholson, 2015).
Kinship ties can have negative effects on family firm executive compensation and performance (M. Cheng et al., 2015; Miller et al., 2007) by motivating family
firm leaders to engage in such activities as nepotism (hir- ing and promoting family members regardless of merit), increased blurring of the lines between family and nonfa- mily matters, and pursuit of noneconomic goals (e.g., socioemotional wealth) potentially at the expense of eco- nomic objectives (Bertrand & Schoar, 2006; O’Brien et al., 2018). A recent study (Yu et al., 2020) found that— compared with family firms with close kinship ties— family firms with distant kinship ties were more likely to appoint a nonfamily CEO and to pay nonfamily execu- tives lower salaries. Examining employee theft in family firms, O’Brien and colleagues (2018) proposed that genetically related family members receive preferential treatment, and a history of such privileges can lead these employees to misuse company resources. They found that purported genetic relatedness to the owner of a busi- ness increased an employee’s theft intentions and decreased the expected severity of sanctions. Studies such as these indicate additional research involving evo- lutionary theory, kinship ties, and executive compensa- tion across family firms is warranted. For example, due to entitlement and altruism that may flow to closely con- nected family members through their kinship ties, the relation between selection of executive, type of execu- tive, and level of pay may be influenced. This leads to research questions such as How does the degree of kin- ship ties between family members in the dominant family coalition moderate the relationship between the selection and type of executive in the team (family vs. nonfamily) and the level of pay received? (RQE7).
Researchers might also investigate the extent to which kinship ties (e.g., close vs. distant vs. a mixture of each) between TMT family members affect the drivers of pay dispersion as well as the outcomes of pay disper- sion; these might include pay satisfaction, justice per- ceptions, stewardship, and team performance. In some cases, the impact of evolutionary theory and kinship theory may have positive moderating effects. For exam- ple, in some instances, the level of pay TMT family members receive for leading the family firm can influ- ence the level of fairness these members perceive and make them less likely to engage in stewardship behav- ior, which significantly contributes to the well-being of the firm and the family. However, when kinship ties among family members are close, this may reduce the negative relationship between level of pay and steward- ship behavior due to the executive’s feelings of obliga- tion toward the family. Thus, another interesting research question could be How do kinship ties of family mem- bers moderate the relationship between pay fairness
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perceptions of family member executives and their degree of stewardship toward the firm? (RQE8).
Family development theory (e.g., Duvall, 1988) con- siders family transitions as the family moves through life cycle stages, how the development of each family member affects overall family development and vice versa as family norms systematically shift across the family’s life cycle (Duvall, 1962). Families that can anticipate changes from one life cycle stage to the next are better equipped to manage transitions among stages. A link between family development stage and financial risk-taking (Chaulk et al., 2003) might be pertinent for top managers who still have children at home and that condition might interact with other factors that influence risk-taking, such as aspects of CEO compensation. For example, the impact of stock options on aggressive risk- taking might be less when executives are still raising family at home. Interestingly, this issue might be consid- ered across all firms, not just family businesses. Other connections between the business life cycle and the fam- ily life cycle might affect the forms of executive com- pensation that are used by the firm as well as the process in which TMT compensation is established in family firms. In this regard, a promising line of inquiry might be the extent to which relationships between stock options and other incentive-based forms of compensa- tion and aggressive risk-taking by the family CEO are moderated by the current stage of family development and the norms guiding decisions made in that stage. This discourse inspires the following research question: How is the relationship between incentive-based compensa- tion and business risk-taking by the family CEO moder- ated by the current stage and norms of the CEO’s family life cycle? (RQE9).
Finally, family communication patterns theory con- siders how communication norms in a family are influ- enced by in-family patterns of agreement and disagreement within the family (Ritchie & Fitzpatrick, 1990) and the degree to which effective communication through conversation and/or conformity occurs in fami- lies. In families that have a high conversational orienta- tion, family members are encouraged to discuss any topic. When a high conformity orientation is present, family members emphasize accepting the same atti- tudes, values, and beliefs (Fitzpatrick & Ritchie, 1994). This theory—in combination with the family systems’ circumplex model, which stresses balance among cohe- sion, flexibility, and communication in a family system (Olson, 2000)—could be used to explore the executive compensation decision-making process and the levels
and types of communication that occur through family meetings and written family documents, such as family constitutions and agreements. For example, they can be used to explore what executive compensation means to family members in terms of motivation and rewards. The type of communication patterns and the degree of balance between the family system and the business system provide fertile areas for future research regard- ing the decision-making process in many family firm activities including the development and implementa- tion of an executive compensation system. Pieper (2010, p. 28) identified the “likely existence of moder- ating variables that impact the relationship between extrinsic and intrinsic motivation.” In our case, execu- tive compensation can be considered a source of extrin- sic motivation, and the resulting individual-level behavior and attitudes can be a source of intrinsic moti- vation for the executive. Based on the discussion above, the communication patterns and the degree of balance between family and business systems might moderate relationships between the motivational effects of execu- tive compensation on the achievement and the value of its individual outcomes. Thus, potential research ques- tions abound. We propose one example: Is the relation between executive compensation as a source of extrin- sic motivation and the sense of accomplishment associ- ated with attaining its individual-level outcomes as an intrinsic reward moderated by elements of the family system (such as cohesion, family communication pat- terns, and flexibility)? (RQE 10).
Discussion and Conclusion
This study reviews the literature on executive compen- sation in family firms and discusses the drivers and out- comes of executive pay levels, pay structure, and pay dispersion. It shows that a focus on publicly traded com- panies, reliance on secondary data, and extensive agency theory assumptions dominate the field. Guided by reflexivity and creative synthesis (Alvesson & Sandberg, 2020), we hold that current theorizing on executive compensation in family businesses has not sufficiently integrated the role of family dynamics. In this article, we therefore incorporated family science theories to guide future research, as elements of the family system may give us important insights about the family’s decision- making processes, the structure, and the outcomes of executive compensation in the family firm. We believe the sample research questions advanced here may inspire researchers to think differently about executive
Michiels et al. 61
compensation in family firms and to broaden the research focus theoretically and empirically.
Family businesses are characterized by the reciprocal relationship between the family system and the business system (Sharma, 2004). However, much of the research about family businesses so far has been nested within the business system (Combs et al., 2020; Odom et al., 2019). This emphasis is due in part to a reliance on theo- ries that come from business-related scholarship (Combs et al., 2020), and often leads to overly simplistic com- parisons between family and nonfamily businesses, ignoring the richness and complexities of family firms (James et al., 2012). This may lead practitioners to per- ceive academic research on the issue as distant from reality, and therefore to often rely on anecdotal evidence and “best practices” when designing executive compen- sation policies. Yet, “the gap between best practices and a more thorough understanding of cause and effect may be a rich zone for meaningful academic research, which can explain why and how certain practices work (or do not work) in specific contexts” (Binz Astrachan et al., 2021, p. 1). To that end, with this article, we encourage researchers to examine executive compensation in family businesses in light of the role of the family sys- tem. Research questions abound; we point to several sample research questions based on family science theories that may help researchers better understand the reasons for the previous mixed results in the litera- ture. In addition, this focus might provide additional insight into how family businesses make decision about the compensation of family executives as well as nonfamily executives, and how the family system affects all aspects of the framework (antecedents, deci- sion-making process, and outcomes) (see Figure 1). This way, future research can inform family business advisors and owners on the specific conditions under which certain compensation practices might obtain the desired effects, thereby obtaining an adequate family- practice fit (Binz Astrachan et al., 2021).
To address the research questions advanced in the previous section, some methodological considerations and strategies to guide future research are important to highlight. In addition to the narrow theoretical focus dis- cussed earlier, perhaps the most problematic trend revealed from our review, is one that is shared with gen- eral studies of executive compensation (Devers et al., 2007; Gerhart et al., 2009; Gomez-Mejia & Wiseman, 1997). We observed a lack of methodological consis- tency throughout the different studies of executive
compensation in family firms. More specifically, the operationalization of what constitutes “executive com- pensation,” “pay dispersion,” “firm performance,” or “performance-related pay” varies greatly in the litera- ture we reviewed generating multiple dependent vari- ables across studies. In a field based on theoretical frameworks that specifically discuss the performance- pay and pay-performance relations, this is troubling, and makes it very difficult to compare the findings. Thus, to advance the field and facilitate comparison across stud- ies, future researchers should carefully explain how the variables are measured and employ multiple measures to serve as robustness tests. Similarly, given that perfor- mance can be both an important driver and outcome of executive compensation, researchers need to be clear in arguments and measurement to avoid confusion when conducting reviews or meta-analyses.
Most of the data used to study executive compensa- tion issues in family firms come from financial data- bases. However, a shift in interest toward family dynamics will require researchers to include factors such as emotions, perceptions, and behaviors associated with executive compensation. To incorporate these fac- tors, future research should consider a wider variety of methodologies that can help us better understand this topic. For example, researchers could consider qualita- tive approaches to understand how executive compensa- tion can affect the motivation of family and nonfamily executives. Researchers could also use experimental research designs to understand some of these dynamics. Another possibility is a multiple respondent approach, which would allow researchers to gain representative- ness by forming a consensus-based data set in which method biases caused by individual respondents’ affect or mood are reduced (e.g., Chua et al., 1999; Holt et al., 2017; Podsakoff et al., 2003). This means that as we open up this research field, by expanding its focus, we can also expand the type of data and information we can obtain, providing a wider methodological perspective of the field. Finally, future research could also consider multilevel designs and explorations. In the study of pre- dictors, it may be that factors at different levels of analy- sis drive executive compensation. Thus, we could also employ multilevel methodologies to advance under- standing of how these mechanisms affect executive compensation in family firms.
One way to broaden the methodological approaches used is to collect information through interviews or sur- veys with human resource managers, executives, family
62 Family Business Review 35(1)
members, and board members who can explain the dif- ferent processes that family businesses follow when determining how both family and nonfamily executives will be paid. A rigorous qualitative research approach could help investigators build and test theory in this important area. It would also be useful to explore the specific governance policies or practices that families and family businesses develop to guide their executive compensation practices, and to what extent this process is formalized and unique. For example, it is useful to understand whether family constitutions stipulate poli- cies regarding compensation of family executives in the firm, and what is tied to compensation of higher level executives in the family firm. Exploration of these issues can promote collaboration from researchers who focus on corporate governance, finance, and human resources within family firms. In addition, findings in these new areas could better inform family business owners as to best practice approaches to the development of compen- sation packages within the family firm.
One final aspect generally overlooked in this research is the importance that cultural context can bring to our understanding of drivers and outcomes linked to com- pensation. Some of our findings provide evidence for differences among China, Africa, the United States, and Europe. Thus, it would be important for researchers to employ cultural context to interpret the results they obtain. After all, family systems differ greatly across cultures (Morioka, 1967). For example, in some cul- tures, entrepreneurs are expected to redistribute their wealth generously among their kin, and failure to do so can lead to painful emotional conflicts (Stewart & Hitt, 2012; Watson, 2007). These norms of cultural kinship, which are often at odds with economic reality, could have a serious impact on family firm executive compen- sation systems, and would be very interesting to explore.
In sum, as review articles “design trajectories, pro- vide roadmaps that guide academic readers trough con- voluted paths and set the direction of travel” (Patriotta, 2020, p. 1276), we hope that our article will stimulate researchers to examine compensation in family busi- nesses in light of the role of the family system to advance family business knowledge and research.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
ORCID iDs
Anneleen Michiels https://orcid.org/0000-0002-2417- 0106 Isabel C. Botero https://orcid.org/0000-0001-7125-1964
Roland E. Kidwell https://orcid.org/0000-0002-8482- 3826
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Author Biographies
Anneleen Michiels, PhD, is an Associate Professor of Finance and Family business at the Research Center for Entrepreneurship and Family firms at Hasselt University, Belgium. She is a for- mer chair of the Strategic Interest Group on Family Business Research at the European Academy of Management and a past Scholar in Residence at the Family Owned Business Institute. Her research focuses on the influence of money on the family business and the business family and is published in academic as well as practitioner-oriented journals.
Isabel C. Botero, PhD, is a faculty member at the University of Louisville. She is a fellow at Family Firm Institute, a Certified Exit Planning Advisor, and has an Advanced Certificate in Family Wealth Advising. Her research focuses on strategic processes, governance, and next-generation issues in family enterprises. She is an associate editor for the journal of family business strategy and a past Scholar in Residence at the Family Owned Business Institute. Her work is published in management, communication, and family business journals.
Roland E. Kidwell, PhD, Louisiana State University, is DeSantis Distinguished Professor of Management, chair of the Management Programs Department, and director of the Adams Center for Entrepreneurship in the College of Business at Florida Atlantic University. His research focuses on executive compensation, succession, and dysfunctional behavior in fam- ily firms. His work has appeared in the Academy of Management Review, Journal of Management, Journal of Business Venturing, Entrepreneurship Theory and Practice, Human Resource Management, and other journals.
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