Does nepotism run in the family? CEO pay and pay‐performance sensitivity in Indian family firms

Abstract

AbstractResearch SummaryUsing a principal–principal agency theory lens, we examine corporate governance and compensation design in family‐owned businesses. We conceptualize how CEO pay and pay‐performance sensitivity is influenced by whether the CEO is a professional or drawn from the controlling family (family CEO). Data from a sample of 277 publicly listed Indian family firms during 2004–2013 support our argument that family CEOs get paid more than professional CEOs. This pattern is stronger in superior‐performing firms that are named after the controlling family (eponymous firms). Furthermore, family CEOs of superior‐performing firms have higher pay‐performance sensitivity compared to professional CEOs of other superior‐performing firms. Our findings reveal nuanced heterogeneity in nepotism in emerging economy family firms—CEO compensation is a mechanism for some controlling families to tunnel corporate resources.Managerial SummaryWe examine whether CEO compensation and its responsiveness to realized firm performance in Indian family firms in influenced by whether the CEO is a professional or drawn from the controlling family (family CEO). Data from a sample of 277 publicly listed Indian family firms during 2004–2013 suggests family CEOs get paid more than professional CEOs. This pattern is stronger in superior‐performing firms that are named after the controlling family (eponymous firms). Furthermore, family CEOs' high compensation is unaffected by poor firm performance and is disproportionately boosted by superior firm performance. These results suggest that poor corporate governance allows some family controlled Indian firms to use CEO compensation as a mechanism to tunnel corporate resources in ways that hurt minority shareholders.