Recently, CEO compensation has been a subject of much public treatment. Particularly during the old ages of the fiscal crisis, when high fillips for top directors attracted a great trade of attending. As Sarah Anderson, an Institute for Policy Studies analyst who specializes in executive wage stated in a CNBC article ( 2008 ) , munificent executive wage is something that people are ashen about across the political spectrum.
However, the subject of CEO compensation in household concerns has received comparatively less attending, while household control is still a common ownership construction. In the United States, for illustration, one tierce of the Fortune 500 houses are at least partly controlled by a individual household keeping significant house ownership ( Anderson & A ; Reeb, 2003 ) . Crystal ( 1998 ) showed in a study on CEO compensation at household house Hilton Hotels that Stephen Bollenbach ‘s compensation far exceeded that of his predecessor, Barron Hilton, the hotel household inheritor. Does this mean that compensation are higher for outside, non-family CEO ‘s than for household CEO ‘s? In order to be able to reply these sort of inquiries, this thesis will look into whether there are differences in compensation between family- and external CEO ‘s. Since in bing literature the chief focal point is on US household houses, this thesis will take European household houses in consideration as good and compare whether ( and to what extent ) these possible differences will be similar to those in the USA. With this comparing, a spread in literature will hopefully be closed.
Derived from the job indicant, the cardinal inquiry that will be dealt with is as follows:
What is the impact of the CEO of a household house being a family- or non-familyA member onA CEO compensation, compared across the US and Europe? A
In order to be able to reply the job statement, this inquiry is divided into two sub inquiries in which the research jobs are defined more specifically.
What is the impact of the CEO of a household house being a family- or non-familyA member on CEO compensation, in the US?
What is the impact of the CEO of a household house being a family- or non-familyA member on CEO compensation, in Europe?
The type of research that will be used in order to be able to reply the job statement and its research inquiries will be descriptive utilizing the method of a literature reappraisal. This means that there will be relied on secondary beginnings, therefore available literature, found for illustration via the database of Tilburg University and scientific diaries in general.
As the job statement describes, this thesis will be about whether there are differences in CEO compensations for CEOs with different positions. Therefore, the constructs that will be of import in order to look into this will be as follows. With ‘compensation ‘ in this context is meant the degree ( comparative sum ) , and the construction of the compensation ( composing ) , the latter being subdivided between the variables ‘fixed compensation ‘ or ‘variable compensation ‘ ( e.g. fillips ) . The construct ‘CEO positions ‘ consist of the variables of a CEO being a member of the household of the house, or non, therefore being a professional hired from outside. The relationship between these two constructs with its different variables which will be investigated in this thesis, can be visualized in the undermentioned manner:
degree and construction
Chief executive officer position
household or non-family
The different factors for which this relation will be investigated are whether the household houses are situated in the US or in Europe. This might look like an unsuitable comparing, since the US is a state and Europe is a continent, but this division is made this manner intentionally. Comparing the United States, for illustration, with the Netherlands seems more logical since this would intend comparing two states alternatively of a state and a continent, the size of the investigated countries would non be compatible at all. The United States would convey in much more information than the Netherlands, therefore it has been decided to compare the United States with the European continent. In this manner, two better comparable groups emerge.
For the construction of this thesis, the order of the research inquiries will be followed, since the replies to the research inquiries will finally take to the declaration of the job statement. Therefore, each chapter will cover with one research inquiry. Before the two research inquiries will be investigated, nevertheless, an excess introductory chapter will first discourse some general theories about the impact of the position of a CEO of a household house onA CEO compensation, incorporating facets that hold for both the US and Europe. After this 2nd chapter, the 3rd chapter will discourse the impact of the CEO of a household house being a family- or non-familyA member onA CEO compensation in the US. Naturally, the 4th chapter will see this impact in Europe. The concluding and 5th chapter will incorporate the decisions, treatments and recommendations, thereby replying the job statement.
Chapter 2: What is the impact of the CEO of a household house being a family- or non-familyA member onA CEO compensation in general?
In order to be able to look into the differences in CEO compensation for household and non-family CEOs and compare this across the United States and Europe, it is of class of import to hold some cognition about what has been written about CEO compensations and cultural differences in general.
As already indicated in the first chapter, CEO compensation has been the subject of much public treatment. Let us, hence, foremost specify what is exactly meant by CEO compensation. As already described in the research methods, with ‘compensation ‘ is meant the degree ( therefore the comparative sum ) , and the construction of the compensation received for the CEOs attempts. This construction is subdivided between the variables ‘fixed compensation ‘ or ‘variable compensation ‘ . But these variables of the construction of the compensation can be specified farther. Harmonizing to Murphy ( 1998 ) ‘most executive wage bundles contain four basic constituents: a base wage, an one-year fillip tied to accounting public presentation, stock options, and long-run inducement programs. ‘ Particularly in the economic recession, tonss of employees lost their occupations, while often CEOs still received utmost wagess for their public presentations, in one of the signifiers described by Murphy. But are those steadfast public presentations even positively influenced by high wagess? McConaughy thinks they are, by saying that bureau theory, which will be discussed in the undermentioned paragraph, predicts that wage for public presentation is effectual in cut downing principle-agent misalignments. Thus the higher the correlativity between wage and public presentation, the better the expected public presentation is. Jensen and Murphy ( 1990 ) detected a low but still important sensitiveness of CEO wage to tauten public presentation every bit good. However harmonizing to Frey and Osterloh ( 2005 ) , steadfast public presentations are non positively influenced by high wagess. They say that directors are given inducements to pull strings public presentation standards by wage for public presentation, and that it motivates them to deceitful histories that are in struggle with the long term house involvement. Unite et Al ( 2008 ) province that a positive relation between wage and public presentation does non keep for houses with a relationship to a household, which indicates that there does look to be a differentiation for household houses within the much discussed subject of CEO compensation.
Fuller and Jensen ( 2002 ) suggest that fillip constructions makes directors concentrate more on short term ends alternatively of long term growing. These constructions are nevertheless designed to aline the directors involvements with those of the proprietors. This brings us to the rule agent theory, to which associating CEO payment to public presentation might be a solution after all.
Principle agent theory
Agency theory is about the struggle of involvement between the rule and the agent of a house. In this context, the principal is the proprietor of the house and the agent is the director or the CEO. The bureau job trades with the struggle that occurs when collaborating parties have different ends or involvements ( Eisenhardt, 1989 ) . As stated above, associating CEO compensation to tauten public presentation trough for illustration fillips and stock options might be a solution to this job, since proprietors and directors involvement might be more aligned in this manner. But the bureau job for family-influenced houses is different in the first topographic point ( Young, Peng, Ahlstrom, Bruton, & A ; Jiang, 2008 ) . When members of an influential household take part in direction, the separation and conflicting ends between proprietors and directors are reduced, compared with non-family houses.
CEO compensation in household houses
When Gomez-Mejia, Larazza- Kintana & A ; Makri ( 2003 ) researched CEO compensation in household concerns with more than one household member involved, they concluded that CEOs that belonged to the household received less compensation than CEOs that did non belong to the household. They found three, general applicable, grounds for this. CEOs related to the household will bask higher occupation security than non-family CEOs. As Beehr et Al. ( 1997 ) pointed out, household CEOs have two functions ; a work related function, and a non-work related function in which they ‘have ‘ to carry through household duties. Because of this dichotomy of functions, a household CEO is rewarded with a more assured occupation ( Gomez-Mejia et Al, 2001 ) . Furthermore, when there is an emotional bond between proctors and employees being judged, the judge is more likely to give positive public presentation feedback assessment. For household houses, this would intend that proctors likely tend to measure the household CEOs more positive, and give them the benefit of the uncertainty more easy. All in all the above suggests that agents, who are harmonizing to the bureau theory largely risk averse, in household concerns trade a higher occupation security for less net incomes.
Furthermore, because of the emotional ties of belonging to a household, household CEOs are less likely to vie in the external labour market. This means that they are less free to take the best offer available to them, which decreases the demand to counterbalance household CEOs with the same bundles as outside CEOs get, who do need those ‘handcuffs ‘ to remain with the company ( Gomez-Mejia, Larazza- Kintana & A ; Makri, 2003 )
Apart from these grounds found by Gomez-Mejia, Larazza- Kintana & A ; Makri, Block ( 2008 ) found a figure of facets in which household CEOs differ from non-family CEOs as good. The first facet he mentions is that the house is non merely an employer for household CEOs. They are improbable to travel against the involvements of the house, since the house has a symbolic significance for them as it symbolizes the heritage and tradition of the household, and hence is likely to be portion of their individuality. Traveling against the involvements of the house would finally intend traveling against themselves, which becomes more evident when household CEOs have the name of the company. Another relevant facet is that household member largely want to go through the house on to the following coevals in line ( Casson & A ; James, 1999 ) . Logically, this would intend that household CEOs focal point on the long-run involvement by for illustration puting in research and development and maintaining good dealingss with the staff of the company ( Block, 2008 ) . Following from Block ‘s first two facets mentioned it appears that the marks of family-CEOs are often non-financial ( Donckels and Frohlich, 1991 ; Harris and Martinez, 1994 ; Tagiuri and Davis, 1992 ) . In decision, harmonizing to Block ( 2008 ) , the involvements of family-CEOs are often strongly aligned with those of the house.
The above is confirmed by Jensen & A ; Meckling ( 1976 ) , who agree with the earlier given statement that the bureau job is less likely to originate in a household concern, as a family-CEO likely has other inducements besides wage. In add-on McConaughy ( 2000 ) agrees with the decision made by Gomez-Mejia, Larazza- Kintana & A ; Makri ( 2003 ) and suggest that this might intend that household houses do non necessitate to pay family-CEOs as high a compensation as non-family CEOs.
However, a converse position on this affair is given by Bebchuck, Fried & A ; Walker ( 2002 ) , who suggest that since CEOs have the power to act upon the board, they can act upon their compensation as good and use this possibility to breed higher compensations for themselves. They province that household CEOs may hold more authorization to make this than non-family CEOs. Apart from being able to act upon 1s fixed wage, CEOs can besides act upon one of the other signifiers of executive wage bundles cited from Murphy at the beginning of this chapter. Dechow, Hutton & A ; Sloan ( 1996 ) indicate that CEOs can be empowered to act upon the worth of their stock options every bit good. This does, nevertheless, depend on the extent to which the options are ‘visible ‘ ( Pollock, Fisher & A ; Wade, 2002 ) . The more household members are on the board and the closer they work with the CEO, the harder it gets to re-price the stock options since they might non be hidden plenty.
All the above indicates that there are many facets of the differences in CEO compensation for family- and non-family CEOs in general, and now that we are cognizant of some of the most of import theories on this the following chapter will concentrate on those differences specifically for the US.
Chapter 3: What is the impact of the CEO of a household house being a family- or non-familyA member on CEO compensation, in the US?
McConaughy ( 2000 ) studied CEO compensation in 82 founding family-firms, from which 47 CEOs are household members and the other 35 are non. The sample of the family-controlled concerns with a household CEO was drawn from the Business Week CEO 1000 and the Business Week Corporate Elite, both incorporating information on 1000 U.S. houses. The sample of the family-firms with a non-family CEO was drawn from a Loyala University, Chicago, probe of household concerns in the Fortune 500, which means that all 82 companies were U.S. houses.
‘ It tests the household inducement alliance hypothesis, which predicts that household CEOs have superior inducements for maximising steadfast value and, hence, need fewer compensation-based inducements. Univariate and multivariate analyses show that household CEOs ‘ compensation degrees are lower and that they receive less incentive-based pay-confirming the household inducement alliance hypothesis and proposing the possible demand for household houses to increase CEO compensation when they replace a founding household CEO with a nonfamily-member CEO. ‘ ( McConaughey, 2000 )
Therefore harmonizing to these consequences household CEOs receive less wage, supplying less wage for their public presentations. For non-family CEOs this is different, intending that to pull, keep on to, and stimulate those CEOs, higher wage degrees are needed since they lack the inducements that family-CEOs bashs have. This goes against the position that household CEOs use their place to pull out extra compensations, as mentioned in the first chapter in conformity with Bebchuck, Fried & A ; Walker ( 2002 ) , who suggest that since CEOs have the power to act upon the board, they can act upon their compensation as good and use this possibility to breed higher compensations for themselves.
Family CEOs having less wage, nevertheless, does non go forth out the option that they might have alternate compensations besides hard currency payments, in for illustration one of the signifiers cited from Murphy before.
In decision, McConaughey ( 2002 ) states that since household CEOs have greater inducements, they do non necessitate every bit much auxiliary inducements trough compensation as non-family CEOs, there by back uping the household control incentive alignment hypothesis. Establishing household CEOs receive less wage. These consequences propose that non-family CEOs have to be paid more to acquire what household CEOs would make.
Deckop ( 1988 ) findings on the topic of CEO compensation are in line with McConaigheys decisions, since he excessively stated that CEOs from outside the house received more compensation than CEOs promoted from within, and that laminitiss of the house received less wage.
Gomez-Mejia, Larraza-Kintana and Makri ( 2003 ) conducted a survey on the determiners of CEO compensation in household houses as good. During a four-year period ( from 1995-1998 ) they collected informations on 253 household controlled house, from which 148 ( therefore 59 % ) had a family-CEO and 105 ( 41 % ) were led by non-family CEOs. This sample came from a indiscriminately selected set of 3000 companies included in the COMPUSTAT database, hence incorporating chiefly U.S. based houses. The consequences indicate that household CEOs of household concerns receive a entire income that is lower than that of non-family CEOs. This comparative disadvantage additions with a rise in the sum invested in research and development and a rise of household ownership concentration, because hereby the household CEOs wage will be depressed. Because of the household ties, household CEOs ‘ wage tends to be more shielded from hazard but more sensitive to systematic concern hazard, which is more unmanageable ( Gomez-Mejia, Larraza-Kintana and Makri, 2003 ) . These consequences are in line with what has been stated above.
Block ( 2008 ) besides published a paper on the construction of executive compensation in household and non-family houses. The sample for his probe was gathered from the Standard & A ; Poor ‘s 500 and their database, ensuing in 2578 observations from 393 U.S. houses.
‘The findings of this paper support the statement that bureau struggles between proprietors and direction are lower in household houses versus non-family houses. It is found that both household direction and the grade of household ownership increase the portion of base wage. ‘ ( Block, 2008 )
At first glimpse, this seems to be a contradictory statement. Block says that there already is an alliance of involvement between the family-CEO and the house, which suggest that they do non necessitate as much wage as non-family CEOs to remain motivated. However, he states that both household direction and the grade of household ownership increase the portion of base wage, and non diminish as seems more logical in the first topographic point. This apparently contradiction is clarified elsewhere in his article, were he states that ‘ in a state of affairs of low information dissymmetry between stockholders and
direction, the fixed constituent of wage should be high, and incentive wage should be low ‘ ( Block 2008 ) . This statement is confirmed by the reference that:
‘In add-on to this, a negative relationship between household direction and the portion of stock option wage is found. There seems to be a strong alliance of involvements between a household CEO and the house for which he or she works. An alternate reading is that household directors are per se more strongly motivated to act in the house ‘s best involvement. ‘ ( Block, 2008 )
In decision, Block ( 2008 ) stated that in US household houses the portion of stock based wage is lower and the portion of base wage is higher than in non-family houses. In a state of affairs of low information dissymmetry between stockholders and direction, which is the instance in household houses since household members frequently know the house better, the fixed constituent of wage should be high and the incentive wage should be low in US household houses, since intrinsic motive plays an of import function for CEOs that belong to the household. Paying a household CEO an highly high compensation might diminish this intrinsic motive, and hence might non be a good thought ( Block, 2008 ) .
A more specific probe refering CEO compensation in US household concerns has been done by Crystal ( 1998 ) . He showed in a study on CEO compensation at household house Hilton Hotels that Stephen Bollenbach ‘s compensation far exceeded that of his predecessor, Barron Hilton, who was the hotel household inheritor. This indicates that in this instance the household CEO received far less wage than the non-family CEO replacement.
Chapter 4: What is the impact of the CEO of a household house being a family- or non-familyA member on CEO compensation, in Europe?
Croci, Gonenc & A ; Ozkan ( 2010 ) researched the impact of household control and institutional investors on CEO compensation in Continental Europe. Although this chapter deals with CEO compensation in Europe, the probe still seems a valuable beginning, since by far the biggest portion of Europe is formed by Continental Europe, were merely the European islands are left out. For their paper, Croci, Gonenc & A ; Ozkan used a dataset of 915 listed houses with 4045 firm-year observations from 14 states, during an eight twelvemonth period from 2001 boulder clay 2008. They expected that household control likely affects the degree and the construction of the CEOs compensation, an outlook stated in the first chapter every bit good. Croci, Gonenc & A ; Ozkan ( 2010 ) province that in household houses equity-based compensation might be comparatively less of import than in widely held houses, since household houses do non hold to be every bit concerned about the alliance of involvements of CEOs and stockholders and hence do non necessitate equity based compensation to accomplish this alliance of inducements. More by and large, since household houses frequently like to maintain control, they might be hesitating to give their CEOs stock options, thereby cut downing the portion of equity-based compensation ( Croci, Gonenc & A ; Ozkan, 2010 ) Therefore, it is expected that a household CEO receives comparatively less equity-based wage.
In their findings, Croci, Gonenc & A ; Ozkan ( 2010 ) indicate that household control moderates the entire degree of CEO wage, including hard currency every bit good as equity-based compensation. This might be because the commanding household is often in an appropriate place to oversee and, if need be, fire the CEO if he/she does non move in conformity with the outlooks of the household. The inclination that household control moderates the entire degree of CEO compensation is even stronger when the CEO is a family-member. Therefore, commanding households do non utilize CEO wage to take away capital from minority stockholders ( Croci, Gonenc & A ; Ozkan, 2010 ) .