A Study On Family Business And CEO Pay-for-Performance Sensitivity

Recently, the public questions high CEO compensation. On one hand, many companies met huge loss and falling share prices. On the other hand, companies paid high compensation to CEOs. The great contrast aroused public indignation. So, many scholars study the relation between CEO compensation and company performance from different angles. Different from the most studies, this paper focused on the listed family firms in China.As the universal existence enterprise form, family businesses play important role in the development of the global economy. In China, especially after the reform and opening, family businesses are rejuvenated. In order to get more power to grow, many family businesses enter the capital market. According to Survey of2013China Family Businesses released by Forbes, by July31th,2013, among A-share listed firms, the number of family businesses is711which accounts for49.7%of private enterprises. Because family businesses play so important role in our economy, we should pay our attention to the CEO compensation of family business.When family businesses choose CEO, some choose family members as CEO, while others choose professional managers as CEO. Different types of CEO have different influences on the CEO compensation incentive. When CEO is not from family, the separation of the management and ownership makes family use performance based pay to inspire CEO. These firms have higher CEO Pay-for-Performance Sensitivity. Through further analysis, I find the separation of control rights and cash flow rights makes family have motive to against the interests of small shareholders. In this situation, the motivation of inspiring CEO declines, which leads lower Pay-for-Performance Sensitivity.The first part of this paper briefly introduces the background, objective and meaning of this study. The second part is the related literature review which briefly introduces the CEO Pay-for-Performance Sensitivity and the separation of control rights and cash flow rights of family business. The third part shows agency theory and managerial compensation theory to strengthen the hypotheses. The fourth part is the research design which shows the models and variations. The fifth part is the empirical research. In this part, I choose non-financial family businesses from A-share listed firms in2008-2012and divided family businesses into two types. If CEO is from family, this kind of family business is called family CEO firms, otherwise is called professional CEO family firms. First, I study how the types of CEO affect the CEO Pay-for-Performance Sensitivity. Then, I study how the separation of the management and ownership influences the CEO Pay-for-Performance Sensitivity in family CEO firms. I find that professional CEO family firms have higher CEO Pay-for-Performance Sensitivity to inspire CEOs. And the separation of control rights and cash flow rights weakens CEO Pay-for-Performance Sensitivity in family CEO firms. The last part of this paper is the conclusion, suggestion and the prospects for future research directions.