Stock option plan practices in family firms: The idiosyncratic private benefits approach

Abstract

In this study, we propose an original explanation, which is an alternative to “optimal contracting theory” and “rent extraction theory”, for the use of stock option plans (SOPs) in family firms. This explanation is based on a classification of the private benefits of control, which include “idiosyncratic private benefits”, or the remuneration of certain family-specific resources that key family figures contribute to a firm. These resources have positive effects on future results; however, in the interim, they are not contractible, and their value cannot be assessed as shareholders’ capital. SOPs with long-term horizons, performance orientations and family beneficiaries, which are inadequately explained by the “optimal contracting” and “rent extraction” theories, could instead be explained by an “idiosyncratic private benefits” approach, as demonstrated in this study. A logit regression confirms the likelihood of these SOP increases with a higher involvement of key family figures in the governance of a firm (family CEO, board familiness, family CEO duality, founder family CEO), consistently with the logical premises of the hypotheses.