Abstract

This study examines CEO compensation in family firms, with a particular focus on the effects exerted by governance characteristics such as ownership concentration, wedge between voting and cash-flow rights rights, and the presence of shareholder agreements. On a sample of Italian-listed companies over the period 1998-2002, we provide empirical evidence that family firms pay CEOs systematically more then other firms, and that the ownership structure exerts a significant effect on CEO compensation. In family firms, CEO pay is indeed positively affected by low ownership concentration, as well as a low wedge between voting and cash flow rights. Moreover, the presence of shareholders agreements has a moderating role on the level of CEO compensation. These effects are more pronounced in family than in non-family firms. The analysis of the relationship between excess compensation and future firm performance reveals that the higher compensation granted to the CEO by family firms is related to worse stock and accounting returns and could therefore be interpreted as a form of rent extraction. This result holds only for lower degrees of ownership concentration, higher wedge, and in absence of shareholder agreements, and supports the hypothesis that the prevalent agency conflict within Italian-listed family firms is between family owners and minority shareholders, instead of between shareholders and managers. The higher compensation granted to the CEO could be the premium for the loyalty of the CEO to the family and for allowing the family to extract private benefits of control.

Citations