HCBE Faculty Articles

Title

The Effect of Family Ownership and Control on Equity-Based Compensation: Evidence from S&P Small Cap Firms

Document Type

Article

Date

2015

Publication Title

Journal of Family Business Management

ISSN or ISBN

2043-6238

Volume

5

Issue

1

First Page

55

Last Page

72

Description

Purpose

– Small public family firms apply contracting differently given the peculiar motivations of founding families and the degree to which they monitor operations. The purpose of this paper is to examine the effects of family ownership, control, and CEO dividends on CEO incentive compensation.

Design/methodology/approach

– The sample consisted of 194 firms, covering about 40 percent of the relevant S&P SmallCap 600 firms. Employed were a logistic regression of the presence of incentive compensation plan and a panel regression of incentive compensation ratio against the family ownership, family CEO, CEO ownership, and dividend income variables as well as firm-specific and CEO-specific control variables.

Findings

– For 1,532 firm-year observations among S&P SmallCap600 index firms during 1999-2007, the authors found that family ownership and CEO dividend income ratio negatively related to the likelihood of an incentive compensation plan and to the ratio of equity-based compensation to total CEO pay. Additionally, the effect of CEO dividend income was limited to firms with outside CEOs.

Practical implications

– Boards of small capitalization firms should consider the incentive effects of CEO dividend income and CEO family membership when setting their compensation policies.

Originality/value

– S&P SmallCap600 index firms are unique because they are much smaller than those listed in the S&P 500 or the Fortune 500, and are subject to more family influence. SmallCap firms are comparable in size to the foreign firms previously researched but are still well covered by analysts, and benefit from audited financial statement variables, which include dividends and stock market returns.

DOI

10.1108/JFBM-04-2014-0008

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Peer Reviewed

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