Family ownership, corporate governance, and top executive compensation

Abstract

In this study we investigate how top management pay is determined in a family firm environment where even listed firms are effectively controlled by a single individual or a single family. Using data from Hong Kong, we find that executive directors\u27 pay is reduced if the directors have substantial stockholdings. Moreover, pay is related to profits but not to stock returns. Our results are consistent with external blockholders and independent non-executive directors persuading firms to base top management compensation on a firm\u27s profitability

Executive compensation in Asia: A critical review and outlook

“…They interpret this finding by suggesting that directors with high stockholdings tend to receive high dividends such that their need for cash compensation will be reduced. In addition, Cheng and Firth (2006) do not find evidence that directors with high stockholdings will use their voting power to award themselves with high pay.…”

“…For example, Cheng and Firth (2006) find a positive relationship between executive pay and firm size in the Hong Kong context. In addition, Ghosh (2006) reports that firm size is a more important factor in determining CEO compensation than firm performance in Indian.…”

“…Consistent with their prediction, they find that director ownership weakens the positive relationship between growth opportunities and executive compensation/bonus amounts. In another study on Hong Kong firms, Cheng and Firth (2006) find evidence that executive directors' stockholdings reduce their total amount of pay in fees, salaries and benefits, bonuses, and pension contributions. They interpret this finding by suggesting that directors with high stockholdings tend to receive high dividends such that their need for cash compensation will be reduced.…”

“…In addition, Buck, Liu, and Skovoroda (2008) find that executive compensation is positively affected by share and accounting performance measures, using a sample of 601 Chinese listed firms from 2000 to 2003. Using data from firms listed on the Hong Kong Stock Exchange from 1994 to 2002, Cheng and Firth (2006) find that executive directors' pay is positively related to accounting performance but not to stock returns. In a comparative study of executive turnover and compensation in the largest Japanese and US firms from 1980 to 1988, Kaplan (1994) finds that Japanese executive turnover and compensation are affected to a greater extent by stock and earning performance measures but to a lesser extent by sales performance measures.…”

“…Board composition Using Hong Kong data, Cheng and Firth (2006) find that the executive pay and performance relationship is stronger in firms with a higher proportion of independent non-executive directors and higher stockholdings by directors. In an investigation of listed manufacturing companies between the years 1997 and 1999 in Taiwan, Lin (2005) finds evidence that firms with less effective board control are associated with higher level of CEO compensation; board control increases when their shareholdings are higher and when the ratio of outside directors is higher.…”