Frugal Principals, Lavish Agents: CEO Compensation in Family-, Founder- and Other Firms

Abstract

Using agency theory we formulate hypotheses about the executive compensation practices among lone founder firms and family firms. We argue that compensation schemes reflect attempts to reduce the agency costs inherent in the different ownership structures. Hence, lone founder-owned firms where owner-manager incentive alignment and monitoring advantages are great will exhibit the lowest levels of total and incentive CEO compensation. By contrast, family-owned firms, while enjoying owner-manager agency advantages over other companies, face unique owner-owner agency conflicts as family owners may pressure their CEOs to serve the family instead of the firm. Higher levels of total and incentive CEO compensation thus were expected to be paid to reduce the impact on the CEO of such pressure. These expectations were borne out in our study of S&P 500 companies. However, we also found contrary to the above rationales that despite their higher compensation packages diffusely held firms did not benefit more from higher CEO compensation than founder- or family-owned firms, nor did they outperform. Moreover, CEO compensation was negatively related to performance in the former. It appears therefore that founder- and family-owned firms employ more efficient compensation packages than more diffusely held public firms.