Managerial ability and CEO pay of family firms in Malaysia: does family involvement in management matter?

Abstract

ABSTRACT Family managers are found to get lower pay, especially when family members are involved in management. This paper examines whether managerial ability has a positive impact on CEO pay in family firms. We further examine whether the relationship is higher for nonfamily CEOs compared with that for family CEOs, and whether family involvement in management affects the relationship. The data covered were hand-collected information on CEOs of 362 listed family firms in Bursa Malaysia during the 2009–2015 period. We found a positive relationship between pay and managerial ability for Malaysian family firms, and nonfamily managers are found to be compensated with a higher pay for their managerial ability compared with family managers. Also, when a family has a dominant involvement in management by chairing the board and remuneration committee, they accord pay increment for every unit increase in a CEOs ability. In the case of family chairing the board, nonfamily CEOs tend to get a higher pay with higher managerial ability compared with family CEOs. Our finding shows that family firms, especially those with a dominant involvement in management, adhere to devising first-best contract when rewarding nonfamily CEOs.