Abstract
This paper mainly discusses the choice of managerial compensation contracts in Chinese family firms. Relation or guanxi in Chinese language is an important factor that should be considered because it can bring the shirking cost to the relation-based manager and the caring cost to the owner under Chinese-style differential mode of association (?chaxu geju?). Our theoretical analysis shows that under some conditions it is optimal for the owner to choose the efficiency wage contract, and that under other conditions it is optimal for the owner to choose the share-based incentive contract.
Highlights
In Chinese family firms, relation or guanxi in Chinese language is an important factor that should be considered in the choice of managerial incentive contracts
It is optimal for the owner to choose the share-based incentive contract
We mainly discuss the choice of managerial compensation contracts in Chinese family firms through an improved principal-agent framework
Summary
The traditional literature usually sets because it does not consider the existence of Chinese-style mutual relation. The owner must comply with the efficiency wage contract in order to incentivize the manager, he bears some kind of spiritual and psychological cost resulting from the relation when the relation-based manager only gets a low efficiency wage. No matter when it is under an efficiency wage contract or under a share-based incentive contract, the fixed salary of the relation-based manager is normalized to zero. This normalization can simplify our analysis to the most degree. (i) At t=1, the owner offers an efficiency wage contract or a share-based incentive contract to the the relation-based manager;.
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