Nonfamily Managers, Family Firms, and the Winner's Curse: The Influence of Noneconomic Goals and Bounded Rationality

Abstract

We explain why family‐centered noneconomic goals and bounded rationality decrease the willingness and ability of small‐ and medium‐sized family firms to hire and provide competitive compensation to nonfamily managers even in a labor market composed of stewards rather than agents. Family‐centered noneconomic goals attenuate the ability to attract high‐quality, nonfamily managers by promoting inferior total compensation packages, fewer opportunities for advancement, idiosyncratic strategies, and higher performance expectations. Furthermore, bounded rationality limits nonfamily managers' ability to meet performance expectations when hired. The result is the “winner's curse,” where neither the economic nor noneconomic goals of family owners are fully achieved.