It's a family affair: How social identification influences family CEO compensation

• Published date: 01 September 2021
• Author: Elisabeth F. Mueller,Miriam Flickinger
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/corg.12375

ORIGINAL ARTICLE

It's a family affair: How social identification influences family

CEO compensation

Elisabeth F. Mueller

1,2

| Miriam Flickinger

3

1

Department of Economics and Management,

Bundeswehr University Munich, Neubiberg,

Germany

2

School of Business, Economics and

Information Systems, University of Passau,

Passau, Germany

3

Department of Management, Freie

Universität Berlin, Berlin, Germany

Correspondence

Miriam Flickinger, Department of

Management, Freie Universität Berlin, Garystr.

21, 14195 Berlin, Germany.

Email: miriam.flickinger@fu-berlin.de

Abstract

Research Question/Issue: This study analyzes the heterogeneity of CEO compensa-

tion in family firms. Specifically, we investigate the relationship between a family

CEO's social identification with the family firm and the level of her or his

compensation.

Research Findings/Insights: Using a sample of S&P 500 family firms between 2006

and 2014, we find that levels of social identification among family CEOs explain the

heterogeneous patterns of CEO compensation among family firms. Our results show

that the level of social identification varies among family CEOs.

Theoretical/Academic Implications: Our findings indicate that differences in

social identification among individual family executives are an important factor in

CEO compensation in family firms. This factor has been overlooked in the litera-

ture, which has instead focused on the explanatory power of faultlines between

family versus non-family firms or family versus non-family executives in family

firms.

Practitioner/Policy Implications: Practitioners may value our finding that socio-

psychological dynamics influence strategic decision-making in family firms, such as

setting the compensation of the family CEO. In particular, practitioners should be

aware of each family CEO's level of identification and should not assume that all

family members equally socially identify with the family firm.

KEYWORDS

corporate governance, CEO compensation, family CEO, family firms, social identification

1|INTRODUCTION

Family-controlled businesses are an important driver of economic

growth and societal and technological progress (Anderson &

Reeb, 2003; Duran et al., 2016; Le Breton-Miller & Miller, 2018;

Villalonga & Amit, 2006). Family control and ownership are common

in firms of all sizes worldwide (De Massis et al., 2018; Morck

et al., 2005). As Villalonga and Amit (2020, p. 241) stated, family firms

“matter very much, and to very many people.”Hence, the distinctive

features of family firms have long been of interest to researchers. For

example, research has found that family firms differ significantly from

other (non-family) firms, such as in their value (e.g., Anderson &

Reeb, 2003); investment horizons (e.g., Bertrand & Schoar, 2006);

management, governance, and control practices (e.g., Villalonga &

Amit, 2006); and innovation strategies (e.g., Chrisman & Patel, 2012).

Such differences help to explain how family firms function differently

Received: 9 July 2020 Revised: 31 March 2021 Accepted: 2 April 2021

DOI: 10.1111/corg.12375

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

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2021 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2021;29:461–478. wileyonlinelibrary.com/journal/corg 461

from firms of other types. Moreover, studying the distinctive features

of family firms is crucial to understand how such firms can make and

sustain their important contributions (Villalonga & Amit, 2020).

One area in which research has begun to investigate such specific

characteristics of family firms is CEO compensation (e.g., Barontini &

Bozzi, 2018; Combs et al., 2010; Croci et al., 2012; Gomez-Mejia

et al., 2003; Jaskiewicz et al., 2017). CEO compensation is an impor-

tant topic of research on family firms because it provides insights into

the incentives and behaviors of individual CEOs, who act as the key

decision-makers in family firms (Cannella et al., 2015; Combs

et al., 2010). Studies in this area have revealed differences in compen-

sation between family and non-family firms (e.g., Croci et al., 2012;

De Cesari et al., 2016) and between family and non-family executives

in family firms (e.g., Barontini & Bozzi, 2018; Block, 2011;

Cie

slak, 2018; Gomez-Mejia et al., 2003; Michiels et al., 2013).

Nevertheless, the heterogeneity of CEO compensation among

family executives remains difficult to explain, as most studies have

failed to consider the effects of family CEOs' individual characteristics,

cognitions, and emotions. Instead, they have focused on how CEO

compensation differs along the faultlines of the groups into which

CEOs fall, such as CEOs in family versus non-family firms (e.g., De

Cesari et al., 2016), family versus non-family CEOs in family firms

(e.g., Gomez-Mejia et al., 2003), and family CEOs who serve with

other family representatives versus lone family member CEOs

(e.g., Combs et al., 2010). This has created a research gap regarding

the role and effects of CEO compensation in family firms. Although

much is known about the compensation-related behavior of certain

groups of CEOs, little is known about individual CEOs in this context.

Recent research emphasizing cognitive and behavioral differences

between CEOs who seemingly fall into the same group (e.g., Cannella

et al., 2015; Miller et al., 2011) has also stressed the need to fill this

research gap.

In our study, therefore, we seek to extend knowledge of the het-

erogeneity of family CEO (i.e., CEOs who are members of the control-

ling family) compensation using insights from social identification

theory (Ashforth & Mael, 1989; Hogg et al., 1995; Tajfel, 1982). Spe-

cifically, we posit that family executives' identification with their

family firms can vary between family CEOs and that this variation has

implications for a CEO's expectations and bargaining efforts regarding

the level of her or his compensation. Several studies have demon-

strated the importance of social identification to family firms in gen-

eral (e.g., Akhter et al., 2016; Cannella et al., 2015; De Massis, 2012;

Le Breton-Miller & Miller, 2014; Shepherd & Haynie, 2009). We build

on these insights by showing that the identification of family members

with the family firm significantly influences numerous processes and

decisions in family firms (Deephouse & Jaskiewicz, 2013), such as

CEO compensation. To examine the relationship between identifica-

tion and compensation, we also build on studies outside the literature

on family firms. For example, we draw on Boivie et al. (2011), who

showed that in general, CEOs' strong identification with their firms

reduces their tendency to engage in activities that incur agency costs

(e.g., decoupling firm performance from CEO pay or perquisites) and

harm the firms they lead.

Our approach to studying CEO compensation in family firms adds

to knowledge in two ways. First, we highlight the important role

played by CEOs' identification with their family firms in CEO compen-

sation. We thereby meet a need identified by Le Breton-Miller and

Miller (2014, p. 671), who suggested that the “domain of family busi-

ness may benefit greatly from researching the origins of social identi-

ties in family firms and examining their consequences for personal

motivation and OB [organizational behavior].”In the context of CEO

compensation in particular, studies of family firms have focused more

on economic theories, such as agency theory and the notion of opti-

mal contracting (e.g., Barontini & Bozzi, 2018; Combs et al., 2010;

Croci et al., 2012; Gomez-Mejia et al., 2003), than on social theories.

This is surprising, because family firms have important social features.

Numerous studies have described the “family effect”in strategic

decision-making processes, whereby the characteristics, history, inter-

actions, and behavioral patterns of the controlling family—through

ownership structure, management, and governance—influence the

decision-making and other outcomes of family firms (Dyer, 2006;

Klein et al., 2005).

Second, we show that CEOs' social identification in family firms

can vary, even within the subset of CEOs who are family members.

This finding not only sheds light on the heterogeneity of previous

results of family firm compensation research but also demonstrates

the need to consider differences between family executives and, more

generally, family firms. In this regard, we fill a gap identified by

Berrone, Cruz, and Gomez-Mejia (2012, p. 270), who suggested that

“partly because of measurement challenges, most current research

treats family firms as homogeneous,”especially with regard to their

“familiness,”a concept that emphasizes familial social ties and cohe-

sion and family members' emotions (Gomez-Mejia et al., 2011;

Zellweger et al., 2013).

The rest of this paper proceeds as follows. First, we review the lit-

erature on family firms and CEO compensation in family firms. Follow-

ing this, we develop our hypotheses regarding the variation in the

social identification of family CEOs with their family firms and how

this influences the CEOs' level of compensation. In our methods sec-

tion, we explain how we tested our predictions using a random-

effects model with a sample of 459 firm-year observations from

79 family firms listed in the S&P 500 during 2006–2014. We conclude

the paper by discussing our findings and providing suggestions for

future research.

2|LITERATURE REVIEW

2.1 |Family firms

A firm is considered a family firm if the controlling family “owns a min-

imum of 5 percent of the shares and at least one family member

(a person related by blood or by marriage to the owning family) serves

as a member of the TMT”(Chrisman & Patel, 2012, p. 983f.). Research

on family firms has suggested that family-owned and family-controlled

firms differ from non-family firms in several respects, such as their

462 MUELLER AND FLICKINGER