Abstract
This paper examines how executive pay is set when a firm is a business group member. Using Korea as a laboratory setting, we find that member firm’s cash compensation for its executives is strongly linked to the stock performance of other members as well as its own. Further analyses reveal that this link to other members’ performance is consistent with the hypothesis of corporate resources being tunneled from one member to another for the benefit of the controlling family. We find that the link is stronger in firms with high control-ownership disparity or low foreign ownership. We also find that the link is tighter to the performance of firms directly owned by the controlling family.
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