Corporate governance progress and the pay premium of owner CEOs: Evidence from Israel

• Published date: 01 September 2022
• Author: Beni Lauterbach,Revital Yosef
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/corg.12431

ORIGINAL ARTICLE

Corporate governance progress and the pay premium of owner

CEOs: Evidence from Israel

Beni Lauterbach | Revital Yosef

School of Business Administration, Bar-Ilan

University, Ramat Gan, Israel

Correspondence

Beni Lauterbach, School of Business

Administration, Bar-Ilan University, Ramat-Gan

52900, Israel.

Email: beni.lauterbach@biu.ac.il

Funding information

Raymond Ackerman Family Chair in Israeli

Corporate Governance; Raya Strauss Center

for Family Business Research at Tel Aviv

University

Abstract

Research Question/Issue: Can progress in corporate governance trim the pay pre-

mium of owner CEOs (CEOs that are members of the control group) over profes-

sional non-owner CEOs?

Research Findings/Insights: We examine CEO pay in 201 concentrated-ownership

companies traded on the Tel Aviv Stock Exchange during 2008–2015 and compare it

to earlier evidence from 1994 to 2001. We find that following the significant

advance in Israeli corporate governance since the beginning of the 21st century,

including some specific CEO pay regulation, the owner CEO pay premium dropped

by almost three-quarters, primarily in partnership-controlled firms (firms controlled

by a coalition of business partners).

Theoretical/Academic Implications: In some concentrated ownership firms control-

ling shareholders extract private benefits by appointing themselves as CEOs and

receiving an excessive owner CEO pay. The problem of owner CEO pay premium

appears much milder in partnership-controlled relative to family-controlled firms, per-

haps due to the more cohesive nature of the family control group.

Practitioner/Policy Implications: Measures such as establishing an independent com-

pensation committee on the board and, more directly, requiring a periodic (say, once

every 3 years) approval of owner CEO pay by a majority of the minority shareholders

vote are effective in cutting owner CEOs' excess pay.

KEYWORDS

corporate governance, CEO compensation, concentrated ownership, family firms, owner CEO

1|INTRODUCTION

Extant evidence on the pay of owner CEOs (CEOs who are also

members of firm's control group) is mixed. Studies of large family

firms in the United States and Europe (e.g., Croci et al., 2012;

Gomez-Mejia et al., 2003) find a negative pay premium for owner

CEOs, that is, that owner CEOs earn less than CEOs in non-family

firms. One possible interpretation of these findings is that family

CEOs are more emotionally attached to their firms than professional

CEOs; thus, they need less pay incentives to serve as firm stewards

(Davis et al., 1997).

However, other studies, examining circumstances in which con-

trolling shareholders are relatively powerful and/or economies where

investor protection is relatively weak, find a significantly positive pay

premium for owner CEOs and interpret it as evidence of private bene-

fits extraction by controlling shareholders. In the United States,

Masulis et al. (2009) find that owner CEOs in dual-class firms receive

a significant pay premium, and Combs et al. (2010) find that when

Received: 16 May 2021 Revised: 12 January 2022 Accepted: 20 January 2022

DOI: 10.1111/corg.12431

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

© 2022 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

542 Corp Govern Int Rev. 2022;30:542–554.

wileyonlinelibrary.com/journal/corg