Executive compensation in firms with concentrated control: The impact of dual class structure and family management

Abstract

We examine how two distinct ownership forms of concentrated control affect executive compensation. We compare executive compensation in dual class firms with that in single class companies with concentrated control. Although both samples of companies have agency problems associated with concentrated control, dual class companies have additional problems associated with controlling shareholders holding smaller equity positions. We show that family members in executive positions in dual class companies are paid significantly more than those of single class companies with concentrated control. The excess is in the form of more incentive compensation (bonuses and stock options). This finding is consistent with optimal contract theory of executive compensation in that the higher compensation is given to prevent dual class executives from taking advantage of their higher voting leverage. Our results are robust to an alternative specification of voting leverage which uses the difference between voting and cash flow rights of controlling shareholders.