Does nepotism run in the family? CEO pay and pay‐performance sensitivity in Indian family firms

Abstract

Research Summary Using a principal–principal agency theory lens, we examine corporate governance and compensation design in family‐owned businesses. We conceptualize how CEO pay and pay‐performance sensitivity is influenced by whether the CEO is a professional or drawn from the controlling family (family CEO). Data from a sample of 277 publicly listed Indian family firms during 2004–2013 support our argument that family CEOs get paid more than professional CEOs. This pattern is stronger in superior‐performing firms that are named after the controlling family (eponymous firms). Furthermore, family CEOs of superior‐performing firms have higher pay‐performance sensitivity compared to professional CEOs of other superior‐performing firms. Our findings reveal nuanced heterogeneity in nepotism in emerging economy family firms—CEO compensation is a mechanism for some controlling families to tunnel corporate resources. Managerial Summary We examine whether CEO compensation and its responsiveness to realized firm performance in Indian family firms in influenced by whether the CEO is a professional or drawn from the controlling family (family CEO). Data from a sample of 277 publicly listed Indian family firms during 2004–2013 suggests family CEOs get paid more than professional CEOs. This pattern is stronger in superior‐performing firms that are named after the controlling family (eponymous firms). Furthermore, family CEOs' high compensation is unaffected by poor firm performance and is disproportionately boosted by superior firm performance. These results suggest that poor corporate governance allows some family controlled Indian firms to use CEO compensation as a mechanism to tunnel corporate resources in ways that hurt minority shareholders.

Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy

“…The findings support the theoretical proposition of agency theory that performance should be used as a positive driver of CEO pay to align the managers' and shareholders' interests (Al‐Shammari, 2021; Amewu & Alagidede, 2021; Dang et al, 2021; Hu & Xu, 2021; Jensen & Meckling, 1976; Ko et al, 2020; Yang et al, 2020; Zoghlami, 2021). This finding equally confirms the research outputs of extant studies such as Chen et al (2021), Bouteska and Mefteh‐Wali (2021), Singh et al (2021), Al‐Faryan (2021), Ibrahim et al (2021), and Bhuyan et al (2020) which affirm the theoretical propositions of the classical agency theory. It, however, contradicts the research outcomes of some other studies such as Olaniyi and Obembe (2015, 2017), Duffhues and Kabir (2008), Aduda (2011), and Faria et al (2014) which supports the theoretical stand of managerial power theory that posits CEO pay to be a factor that aggravates agency problem rather than scaling it down (Bebchuk et al, 2011; Bebchuk & Fried, 2003).…”

“…The coefficient of firm size (proxy by the log of total assets) is persistently positive and significant in all the estimated models. This shows that firm size is an important positive driver of CEO pay in Nigerian firms (Chen et al, 2021). This aligns with the theoretical proposition of managerial power theory which signifies that professional manager prefers tying their pay packages and incentives to size rather than firm performance (Olaniyi, 2019; Olaniyi, Obembe, et al, 2017; Tosi et al, 2000).…”

Organizational Resilience and Family Firm Performance: The Role of Socioemotional Wealth

“…The Role of Socioemotional Wealth 534Previously, earlier studies emphasised the benefits of family businesses in reducing agency problems by decreasing agency costs by the indistinct separation between ownership and management (Chen, Chittoor, and Vissa, 2021;Lee and Chu, 2017;Zhou, Tam, and Yu, 2013). However, our results are similar to the former concerns about the undesirable effect of family involvement in ownership, management, and control (Naldi, Nordqvist, Sjolberg, and Wiklund, 2007), particularly the observation that family involvement is an obstacle to achieving family business performance (Hillier and McColgan, 2009).…”

Overcoming institutional challenges in cross-border acquisitions: how home- and host-country acquisition experiences shorten the deal completion phase

“…Because of systematic differences in procedures and the required time to complete them in these countries, the duration of the deal completion stage varies across them. Following past studies (Chen et al , 2021; Fung et al , 2016; Gaur et al , 2013; Patnaik, 2019), we used a country-year median-adjusted measure that has the advantage of controlling for the deal completion stage duration differences across countries. To operationalize the country-year median-adjusted deal completion duration, we first calculated the duration of deal completion for “local acquisitions,” where both the acquiring and target firms are from the same country.…”

“…Because of systematic differences in procedures and the required time to complete them in these countries, the duration of the deal completion stage varies across them. Following past studies (Chen et al, 2021;Fung et al, 2016;Gaur et al, 2013;Patnaik, 2019), we used a country-year median-adjusted measure that has the advantage of controlling for the deal completion stage duration differences across countries.…”