Jaskiewicz Et Al 2017 The Effects of Founder and Family Ownership On Hired Ceos Incentives and Firm Performance

1042-2587
C 2015 Baylor University

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The Effects of Founder

and Family Ownership
on Hired CEOs’
Incentives and Firm
Performance
Peter Jaskiewicz
Joern H. Block
James G. Combs
Danny Miller
Although large owners monitor managers effectively, they differ in important ways.
Whereas founder owners focus on firm performance, family owners also pursue socio-
emotional goals. We leverage this distinction to theorize that family owners offer hired
CEOs more incentive pay—to attract nonfamily CEOs, signal good governance, and
achieve better firm performance. Without socioemotional wealth distractions, founder
owners do not need high incentives and overusing them is counterproductive. Bayesian
regressions using a panel of 335 S&P 500 firms support our theory. A key implication is
that founder and family owners approach governance differently and these differences
affect firm performance.
Introduction
Most firms around the world are owned by their founders or by families, and they con-
tribute significantly to economic growth, employment, and prosperity (La Porta, Lopez-de-
Silanes, & Shleifer, 1999; Steier, 2007; Zahra, Hayton, & Salvato, 2004). The most
successful founder- and family-owned firms often sell shares to the public as they grow in
size and significance. Indeed, such firms represent about a third of all publicly listed firms
in the United States (Anderson & Reeb, 2003). Although these firms are large, research has
shown that founders and families continue to influence their strategies, governance, and
performance (He, 2008; Miller, Le Breton-Miller, Lester, & Cannella, 2007).
Understanding how founders and families exert continued influence is important
because prior research shows that these owners have very different goals. In particular,
founder owners are focused almost exclusively on growth and financial performance
Please send correspondence to: Peter Jaskiewicz, tel.: 514-848-2424 ext. 2775; e-mail: peter.jaskiewicz@
concordia.ca.
January, 2017 73
DOI: 10.1111/etap.12169
(e.g., Miller, Le Breton-Miller, & Lester, 2011; Miller et al., 2007) whereas family own-
ers also pursue socioemotional (i.e., affective) goals, such as dynastic control, family-
member employment, and enhanced reputation (Astrachan & Jaskiewicz, 2008; Chrisman,
Chua, Pearson, & Barnett, 2012; Deephouse & Jaskiewicz, 2013; Gomez-Mejıa, Cruz,
Berrone, & De Castro, 2011; Gomez-Mejıa, Haynes, Nu~nez-Nickel, Jacobson, &
Moyano-Fuentes, 2007). These distinct goal foci are important because they have conse-
quences for shareholders, employees, and other stakeholders (Gomez-Mejıa et al., 2011;
Miller et al., 2011). For example, founders’ focus on financial performance helps share-
holders (Miller et al., 2007), while employees fare better, on average, in family firms
where socioemotional issues matter (Block, 2010).
The most common way these large owners pursue their distinctive goals is by serving
as CEOs (He, 2008; Naldi, Cennamo, Corbetta, & Gomez-Mejıa, 2013), but this source of
influence is often temporary in that founders and families at large public firms must even-
tually hire CEOs who might not fully embrace the founders’ or family’s goals (Boeker &
Karichalil, 2002; Chua, Chrisman, & Bergiel, 2009). Whereas hiring a professional CEO
reduces these owners’ overall control, prior research shows that large owners still can
exercise considerable influence (Gomez-Mejıa, Larraza-Kintana, & Makri, 2003; Miller
et al., 2011). One key way they do this is by shaping hired CEOs’ compensation. Specifi-
cally, research shows that large owners, such as founders and families, reduce overall
CEO compensation and tighten the link between CEO compensation and firm perform-
ance (G omez-Mejıa, Tosi, & Hinkin, 1987; McConaughy, 2000; Tosi, Werner, Katz, &
Gomez-Mejıa, 2000; Werner, Tosi, & Gomez-Mejıa, 2005).1
CEO compensation research, however, has tended to treat all large owners alike (e.g.,
Gomez-Mejıa et al., 1987; Tosi & Gomez-Mejıa, 1989). We challenge this implicit
assumption based on research showing that founder and family owners possess distinct
goal foci (Miller et al., 2007, 2011), and we build theory explaining why founder and fam-
ily owners are (1) different in the way they influence their hired CEOs’ compensation and
(2) in the way they link CEO incentives to firm performance. Given that founder and fam-
ily owners’ distinct goals have important implications for shareholders, employees, and
other stakeholders, and that a key way large owners pursue their goals is by exercising
influence over their hired CEOs’ compensation, it seems worthwhile to learn whether
founder and family owners are different in how they influence CEO compensation and its
link to firm performance. Such knowledge is important because failure to distinguish
among large owners might mislead researchers into assuming that they are similar in their
CEO compensation and other governance practices.
Chrisman, Memili, and Misra (2014) and Chua et al. (2009) took important first steps
by developing theory to explain differences between family and hired managers’ abilities,
evaluations, likely compensation, and probable success. We build on these efforts and,
more generally, on agency and signaling theories to develop and test theory about the
influence of founder and family ownership on hired CEOs’ incentive compensation and
the link between CEO incentives and firm performance. Our focus is on CEO incentives
because they represent the lion’s share of CEO compensation in large public firms (e.g.,
Hayes, Lemmon, & Qiu, 2012), and because they focus hired CEOs’ attention on share-
holder returns, which might weaken their focus on other goals such as family owners’
socioemotional wealth.
Although it might seem at first that offering incentives to hired CEOs and tying those
incentives to firm performance would undermine family owners’ pursuit of
1. Our theory applies to large public firms, so “large owners” usually hold between 5 and 40% of shares.
74 ENTREPRENEURSHIP THEORY and PRACTICE

socioemotional wealth, our central theoretical contribution is to explain why family own-
ers do exactly that. That is, based on agency and signaling theories, we suggest that firms
with family owners offer greater CEO incentive compensation than do founder owners,
both to entice high-quality CEOs to join the firm and to signal to other shareholders that
the family shares their concerns about financial performance. Doing so might sacrifice
some forms of socioemotional wealth (e.g., environmental investments—Berrone, Cruz,
Gomez-Mejia, & Larraza-Kintani, 2010), but allows family owners to retain the support
of other shareholders and thereby maintain their influence in key decisions, which is itself
a foundational socioemotional wealth goal (Gomez-Mejıa et al., 2011). Further, in an
effort to offset lost socioemotional wealth from having a nonfamily CEO, family owners
will bind higher CEO incentives tightly to firm performance—more so than their widely
held (i.e., manager-controlled—Gomez-Mejıa et al., 1987) counterparts. Founder owners,
in contrast, do not need to offer high CEO incentives because they are well known to be
effective at monitoring and they are focused almost exclusively on firm growth and per-
formance. Indeed, high CEO incentives in the presence of founder ownership suggest that
founder owners are not engaged in monitoring, and that firm performance might suffer.
Our empirical contribution is to find support for our theory using Bayesian regression anal-
ysis on a panel of 335 S&P 500 firms. Specifically, we (1) find different founder and family
ownership effects on CEO incentive compensation and (2) different founder and family owner-
ship effects on the CEO compensation–firm performance relationship. Our theory and results
have important implications for understanding performance differences among firms. Specifi-
cally, founder owners outperform (e.g., Miller et al., 2007) because most founder owners con-
tinue to play an important monitoring role after stepping down as CEO; while many family
owners underperform, those that hire external CEOs and tie incentives to performance do
better.
Theory Development and Hypotheses
Ownership, CEO Compensation, and Firm Performance

The separation of ownership and control in large public firms with widely held own-
ership creates a principal–agent problem that has been long acknowledged and well
researched (Berle & Means, 1932; Fama & Jensen, 1983; Jensen & Meckling, 1976). The
essential problem is that managerial work is complex and largely hidden from principals’
(i.e., owners’) view, so it is difficult to know (through monitoring) whether agents are act-
ing in principals’ best interests (Eisenhardt, 1989). Accordingly, agency theory predicts
that boards of directors, as shareholder representatives, will institute strong CEO
incentive compensation to align CEOs’ incentives with shareholders’ interests (Jensen &
Murphy, 1990; Tosi et al., 2000). CEO compensation research shows that CEOs do
indeed receive substantial incentive compensation and that incentives rise and fall with
the severity of principals’ monitoring problems. CEOs are given more incentives, for
instance, as job complexity, information processing demands, and discretion in decision-
making increase (Carpenter & Sanders, 2004; Finkelstein & Boyd, 1998; Henderson &
Fredrickson, 1996). Such job attributes mean that CEOs’ actions affect firm performance,
but that it is difficult for shareholders to know in advance if CEOs are making the best
decisions (Balkin, Markman, & Gomez-Mejıa, 2000).
A partial solution to the principal–agent problem occurs when there is a large owner
who has both the power and incentive to directly monitor managers. Consistent with
agency theory, CEO compensation falls when active monitoring by a large owner reduces
January, 2017 75
the need for shareholders to rely largely on CEO incentives to protect their interests
(Barkema & G omez-Mejıa, 1998; Lippert & Moore, 1995; Rediker & Seth, 1995).2 Large
owners, on average, also make sure that CEO incentives are tightly linked to firm per-
formance (G omez-Mejıa et al., 1987; Tosi et al., 2000; Werner et al., 2005). However,
large owners also create the potential for a second kind of agency problem, what Lubatkin
(2007, p. 61) calls the “principal–principal” problem, wherein large shareholders divert
resources toward self-interested goals that potentially harm firm performance (Jones,
Makri, & G omez-Mejıa, 2008; Villalonga & Amit, 2006).
Although prior CEO compensation research implicitly assumes that all owners are
alike (e.g., G
omez-Mejıa et al., 1987; Tosi et al., 2000; Werner et al., 2005), we challenge
this assumption based on research showing important goal differences between family-
and founder-owned firms; such differences imply that principal–principal problems are
not the same for all large owners. In particular, research shows important goal differences
between family- and founder-owned firms that create different agency problems (e.g.,
Miller et al., 2007, 2011). A founder-owned firm is defined by the presence of one or
more founder owners with no family members involved as owners, managers, or board
members. Family-owned firms, in contrast, are defined by the presence of at least one
family member other than the founder involved as an owner, manager, or board member.
By definition, founder- and family-owned firms are mutually exclusive (Miller et al.,
2007).3 Because founder owners tend to focus on firm growth and performance goals,
principal–principal agency problems are relatively low (Miller et al., 2007, 2011).4
Family owners, in contrast, might have broad socioemotional goals, such as preserving
the family’s reputation for good deeds and employing family members (Carney, 2005;
Chrisman et al., 2012; Deephouse & Jaskiewicz, 2013; Gomez-Mejıa et al., 2011), and
these can create principal–principal conflicts for nonfamily shareholders (Morck,
Wolfenzon, & Yeung, 2005; Villalonga & Amit, 2006). Although prior theory describes
different agency problems among founder- and family-owned firms, it is unknown
whether these differences affect CEO incentive pay. Because CEO incentives are an
important way that owners align the interests of owners and managers, there is merit in
understanding how CEO incentive compensation and its tie to firm performance vary
across firms with different large owners.
Fortunately, researchers have begun to explore how large owners impact CEO incen-
tive compensation. Two studies focused on family firms and investigate whether CEO
compensation differs between family and manager-controlled firms (i.e., Combs, Penny,
Crook, & Short, 2010; Gomez-Mejıa et al., 2003). They discovered that, except for family
firms where only one family member actively participates, family-member CEOs earn
less incentive, fixed, and total compensation (Combs et al., 2010; Gomez-Mejıa et al.).
2. Agency-based theory that monitoring by large owners and CEO incentives are substitutes is well estab-
lished and consistent with several (cited) empirical studies. This does not, however, imply that substitution
is perfect and firms with large owners use zero CEO incentives. It means only that they do not rely wholly
on incentives. Indeed, any incentive scheme will require some monitoring and more complex incentive
schemes might even require relatively more monitoring in order to prevent abuse.
3. Our definition is the same as in Miller et al. (2007, 2011), but we do not use the term “lone founder”
because there can be multiple unrelated founders in founder firms. Also, we label founder-owned but
family-managed firms as family-owned firms because Miller et al. (2011) show that founder-owned firms
start acting like family-owned firms when a second family member becomes involved as owner, manager, or
board member.
4. Founder firms are not immune to principal–principal agency conflict because founders can pursue private
benefits of control (i.e., financial benefits from exerting organizational influence) to the detriment of minor-
ity shareholders (e.g., Demsetz & Lehn, 1985).

Two other studies showed that founder CEOs also receive less incentive and total com-
pensation than their counterparts at manager-controlled firms (He, 2008; Wasserman,
2006). These four studies take valuable steps toward understanding how families and
founders influence CEO compensation, but they also highlight two questions that are
important to address in order to extend knowledge in this area.
First, whereas compensation for founder- and family-member CEOs differs from
CEOs at other firms (e.g., Finkelstein & Hambrick, 1989; Gomez-Mejıa et al., 2003; He,
2008; Wasserman, 2006), it is not known whether incentive compensation differs
between hired CEOs in founder- and family-owned firms. This is important because goal
differences between founder and family owners (Miller et al., 2007, 2011) may impact
owners’ desire to incentivize hired CEOs. Chrisman et al. (2014), for example, theorize
that despite the need to pay more to entice high-quality nonfamily managers, family firms
might underpay hired CEOs in a misguided effort to protect socioemotional wealth (see
also Chua et al., 2009). Although their theory suggests that hired managers in founder and
family firms are compensated differently from one another, and from managers in other
firms, empirical evidence is lacking.
Second, although a key goal of CEO incentive compensation in manager-controlled
firms is to reduce agency conflicts by incentivizing CEOs to maximize firm performance
(Werner & Tosi, 1995), the link between CEO incentive compensation and firm perform-
ance is weaker than agency theory anticipates (Jensen & Murphy, 1990; Tosi et al.,
2000). In particular, CEOs at manager-controlled firms frequently increase their incentive
compensation and limit the extent to which it is tied to firm performance (e.g., Gomez-
Mejıa et al., 1987; Werner & Tosi). What is not known is whether there are differences
among large owners in their ability to tie CEO compensation to firm performance. Given
different agency conflicts in founder- and family-owned firms, it appears important to
know whether CEO incentive compensation is an effective tool for mitigating agency
conflicts in firms with different large owners.
In answering these questions, it is important to separate founders’ and families’ influ-
ence as owners from other sources of influence (i.e., as CEOs or board members). Agency
theory asserts that a central purpose of CEO incentives is to focus CEOs’ attention on
shareholder wealth (Jensen & Murphy, 1990). When the CEO is a large owner as in the
case of founder- and family-member CEOs, it is not surprising that such incentives are
not needed (G omez-Mejıa et al., 2003; He, 2008; Wasserman, 2006) because there is little
separation of ownership and control (i.e., the agent and key principal are the same per-
son—Fama & Jensen, 1983). Knowing that founders and family member CEOs take less
compensation, however, does not reveal whether founder and family owners are equipped
to focus the interests of hired CEOs on firm performance. This is important because
whereas recent theory suggests that founders and families impact firms differently in dif-
ferent roles—i.e., as top managers, board members, and owners (He; Miller et al., 2011;
Villalonga & Amit, 2006)—the empirical practice of using indicator variables that com-
bine these effects has resulted in an inability to empirically separate owners’ distinctive
roles (e.g., Anderson & Reeb, 2003; Miller et al., 2007).
CEO Incentive Pay in Founder-Owned Firms

Relative to dispersed owners with small ownership stakes, agency theory anticipates
that large owners have more incentive and ability to monitor managers’ decisions and
influence their actions (Fama & Jensen, 1983; Jensen & Meckling, 1976). These owners
often have representatives on the board, and managers will consult with them regarding
January, 2017 77
important decisions (Maury & Pajuste, 2005; Park & Shin, 2004). Thus, firms with large
owners need not rely on incentives as the only way to ensure that managers take actions in
shareholders’ best interests (Burkart, Gromb, & Panunzi, 1997; Eisenhardt, 1989).
Indeed, there is strong evidence at the firm level that incentives decline as principals’ abil-
ity to perform direct monitoring improves (Aghion & Bolton, 1992; Gomez-Mejıa et al.,
1987; Maug, 1998; Rediker & Seth, 1995).5
Founder owners should be particularly well equipped to perform such monitoring.
They are emotionally and financially attached to their firms (Arthurs & Busenitz, 2003;
He, 2008). They identify profoundly with their firms and are emotionally committed to
their success (Miller et al., 2011). Founders realize their financial and emotional ambi-
tions by means of their firms’ long-term success (Langlois, 2007; Schumpeter, 1934).
This is especially true of founders whose firms are already large and well established
(Miller et al., 2007). According to Wasserman (2006), a founder will even sell ownership
and relinquish control if it will provide means for further firm growth. Not surprisingly,
founder-owned firms often pursue above average growth and performance goals. Because
founder agendas align particularly well with other shareholders’ interests, agency prob-
lems are relatively low when founders also serve as CEOs or members of the board of
directors (He; Langlois; Miller et al., 2007, 2011).
Even when founder owners are no longer CEOs or on the board of directors, they
retain their deep and tacit knowledge about the firms they built. Because founder owners
have been present since day one, they know major customers, suppliers, and key employ-
ees—especially top managers. Thus, founders have the expertise to effectively monitor
hired CEOs, and their ownership power and emotional attachment give them incentive to
do so (He, 2008; Jensen & Meckling, 1976). As a result, founder owners can evaluate
CEO decisions and observe and monitor CEO actions to make sure that decisions and
actions are geared toward maximizing firm performance. Such monitoring, according to
agency theory, reduces the need to rely mostly on incentives to align the interests of hired
managers and shareholders (Fahlenbrach, 2009; Hall, 2003; Himmelberg & Hubbard,
2000; Murphy, 1999). Thus, the more ownership founders hold, the more power and
financial incentive they have to effectively monitor hired CEOs and avoid the use of
unnecessarily high CEO incentive pay. Accordingly, we expect that:
Hypothesis 1: Founder ownership has a negative effect on hired CEOs’ incentive

compensation.
CEO Incentive Pay in Family-Owned Firms

Like founder owners, family owners have strong incentives to monitor their hired
CEOs (Fama & Jensen, 1983; Gomez-Mejıa et al., 1987, 2003). In addition to their finan-
cial wealth, the family’s history, status, and reputation are inextricably tied to the firm
(Deephouse & Jaskiewicz, 2013; Gomez-Mejıa et al., 2007; Miller et al., 2011). Unlike
founder owners, however, family owners also pursue socioemotional wealth goals
(Gomez-Mejıa et al., 2011), and evidence suggests that socioemotional wealth goals
5. Hoskisson, Castleton, and Withers (2009) observe that incentives and several sources of monitoring (e.g.,
board independence, ownership concentration) have increased jointly at the society level, and theorized that
incentives and monitoring might have complementary ratcheting effects rather than the substitution effects
observed at the firm level. We address this alternative theory in the Discussion section.

regularly detract from firm performance (Gomez-Mejıa et al., 2007, 2011). Several recent
studies suggest that the strength of family involvement in firm ownership, management,
and on the board is positively related to the strength of socioemotional wealth goals in
family firms (Chrisman et al., 2012; Deephouse & Jaskiewicz; Naldi et al., 2013).
Prior research on private family firms has also shown that family owners might sacri-
fice financial returns in exchange for socioemotional wealth—especially when a focus on
financial returns might weaken the family’s control (e.g., Gomez-Mejıa et al., 2007).
Among publicly listed firms, however, a family’s control, and thus its power to protect
socioemotional wealth, is contingent on high share prices and satisfied shareholders
(Morck, Shleifer, & Vishny, 1989; Slovin & Sushka, 1993). This raises a conundrum for
family owners in that they could either satisfy family members by hiring a family-
member CEO, focusing on socioemotional goals, and underperforming as suggested by
previous research (Bloom & van Reenen, 2007; Naldi et al., 2013; Perez-Gonzalez,
2006), or they can hire nonfamily CEOs, tie CEO incentive pay to firm performance, and
achieve superior firm performance at the cost of some socioemotional wealth.6 The latter
is in line with the idea that some families focus on firm performance by pursuing only
those socioemotional wealth goals that can be aligned with firm performance (i.e., reputa-
tion—Deephouse & Jaskiewicz, 2013), but give up those socioemotional goals that are
incompatible with firm performance (i.e., family management jobs as a birthright; Bloom
& van Reenen). Chua et al. (2009) and Chrisman et al. (2014) propose that when family
owners hire nonfamily CEOs, they might attempt to overcompensate for lost
socioemotional wealth with a greater focus on financial returns. Although hiring a non-
family CEO and giving them strong performance-based incentives might reduce the fam-
ily’s ability to pursue socioemotional wealth goals that are inconsistent with performance
maximization (e.g., environmental investments—Berrone et al., 2010), it can increase the
family’s hold on the most essential socioemotional wealth goal, which is maintaining
family control over the firm (Gomez-Mejıa et al., 2007).
However, because it is well known that family owners often focus on socioemotional
wealth goals that undermine firm performance, nonfamily shareholders in family-owned
firms may be concerned that resources might be directed toward the family’s socioemo-
tional wealth and away from financial performance—i.e., the principal–principal problem
(Bertrand & Schoar, 2006; Villalonga & Amit, 2006). Accordingly, these shareholders
need strong signals that their interests are central to management, and the need for such
assurance rises with the level of family ownership and influence that fosters concerns that
resources might be diverted toward socioemotional goals.
Family owners of publicly listed firms care about these shareholder concerns because
families depend at least partly on nonfamily shareholders’ support to maintain significant
control, which is itself a foundational socioemotional wealth goal (Gomez-Mejıa et al.,
2007). Thus, to avoid having their share prices discounted by wary shareholders, boards
of directors need to send strong signals to shareholders that governance is sound and
shareholders’ interests are protected (Certo, 2003; Miller & del Carmen Triana, 2009).
Boards of family-owned firms need to send strong signals because the quality of top-
management decision making and board monitoring is difficult and costly for sharehold-
ers to evaluate (Beatty & Zajac, 1994; Hendry, 2002). Strong signals are visible to
6. Family firms are heterogeneous in their pursuit of socioemotional goals (Chrisman et al., 2012): Large,
later generation and publicly listed family firms tend to focus less on socioemotional wealth than smaller,
first generation, and privately held family firms (Jaskiewicz, Miller, Block, & Combs, 2014; Miller et al.,
2011; Naldi et al., 2013; Schulze , Lubatkin, Dino, & Buchholtz, 2001).
January, 2017 79
recipients, easily interpreted, and costly in that the signal differentiates among signalers
(Connelly, Certo, Ireland, & Reutzel, 2011).
Perhaps the most visible and easily interpreted signal that a family can send is to relin-
quish the family CEO position and hire a professional CEO (Naldi et al., 2013). This is a
costly signal in that hired CEOs are unlikely to pursue socioemotional wealth goals that
are detrimental to firm performance; hired CEOs must focus on shareholder interests in
order to maintain their reputation and viability in the labor market (Cannella, Fraser, &
Lee, 1995; G omez-Mejıa, Nu~nez-Nickel, & Gutierrez, 2001). Indeed, top-notch candi-
dates at family-owned firms might require a premium that compensates them for the per-
sonal risk that comes with working in a family firm (Chrisman et al., 2014); CEO job
candidates might rightfully fear being asked to pursue socioemotional wealth goals
that—although valued by family owners—reduce their own market value and reputation
(Fiegener, 2005). As a result, nonfamily CEOs should demand larger pay packages. In
particular, they might ask for more incentive pay so they can focus on firm performance
rather than socioemotional wealth, and thus avoid underperforming on both counts
(Chrisman et al.). Indeed, CEO incentive compensation above industry norms is likely to
attract top-notch CEOs from competing firms, in part, because it signals to potential CEO
candidates that they will be given the discretion that they need to maximize firm perform-
ance. An important part of that discretion might be the freedom to build their own high-
caliber management team without being forced to include underperforming family
members.
Once the family has signaled its willingness to sacrifice some socioemotional wealth by
hiring a (nonfamily) CEO, signaling theory suggests that the family will also support their
hired CEO’s demands for greater incentive pay because shareholders discount the value of
firms when they receive inconsistent signals (Gao, Darroch, Mather, & MacGregor, 2008),
and hiring a nonfamily CEO without supporting incentives might send mixed signals. Prior
research shows that CEO compensation is an important signal for shareholders (Zajac &
Westphal, 1995), so failing to support the hired CEO by not offering the incentives that
shareholders expect might undermine much of the signaling value about family owners’
“true intentions” that is gained by hiring a professional CEO in the first place.
Overall, these arguments suggest that family owners will offer more CEO incentive
pay than other firms. They offer more than founder-owned firms because whereas found-
ers and families both have deep tacit knowledge about the firm to aid monitoring, share-
holders rightfully fear that families but not founders will use this knowledge to direct
hired managers toward socioemotional wealth goals that are not fully compatible with
firm performance (Chrisman et al., 2012; Villalonga & Amit, 2006). To reassure share-
holders and maintain control, families will hire nonfamily CEOs and offer high incentive
pay. Family owners might even offer greater incentives than what is found at manager-
controlled firms to attract talented CEOs who might otherwise avoid working for family
owners (Chrisman et al., 2014). Thus, we predict that:
Hypothesis 2: Family ownership has a positive effect on hired CEOs’ incentive

compensation.
CEO Incentive Pay and Firm Performance

Building on agency and signaling theories, we theorized that founder owners with
hired CEOs offer fewer CEO incentives whereas family owners with hired CEOs offer

more. The higher use of CEO incentives in family-relative to founder-owned firms, how-
ever, raises questions about the incentives’ effectiveness relative to manager-controlled
firms.
Among manager-controlled firms, powerful managers use their discretion to separate
incentive compensation from actual firm performance (Gomez-Mejıa et al., 1987; Tosi &
Gomez-Mejıa, 1989; Werner et al., 2005). They do this by encouraging boards to adopt
low performance targets (Zajac & Westphal, 1995), reprice stock options (Callaghan,
Saly, & Subramaniam, 2004; Pollock, Fischer, & Wade, 2002), or compare the CEO to
weak peers (Gong, Li, & Shin, 2011). Because CEO incentives can be so easily separated
from performance in manager-controlled firms, the link between incentive compensation
and actual performance is weaker than at firms with large owners (e.g., Gomez-Mejıa
et al.; Werner et al.).
Among the large owners who might step in to tie CEO incentives to firm perform-
ance, in theory, founders confront the fewest agency problems (He, 2008; Miller et al.,
2007). Their financial and emotional goals are strongly tied to the firm and its financial
performance (Miller et al., 2007). As a result, founder owners do not need to offer CEOs
high incentive compensation in order to signal good governance to shareholders (Miller
et al., 2007, 2011), or to compensate them for large personal risks associated with being
asked to pursue socioemotional wealth (Chrisman et al., 2014). Finally, founders have
deep knowledge of their firm and relationships with stakeholders, including managers,
which is why founder-controlled firms outperform among large public firms in the United
States (Miller et al., 2007; Villalonga & Amit, 2006). Thus, even after founder owners are
replaced with hired CEOs, they have strong incentives (as large owners) and the ability
(because of deep knowledge and experience) to directly observe and monitor managers’
actions—thereby reducing the degree to which they must rely on CEO incentives to make
sure CEOs are focused on shareholder actions (Baysinger & Hoskisson, 1990; Rediker &
Seth, 1995). We therefore predicted that founder owners monitor their hired CEOs and
rely less on CEO incentives (Hypothesis 1).
Accordingly, below average CEO incentives should be performance optimizing for
firms with founder owners. Indeed, average or above average CEO incentives at such
firms might indicate either that the founder is no longer actively engaged in monitoring,
or that the board has lost confidence in the founder and has incentivized the hired CEO to
act in shareholder interests regardless of founder input. Either way, the firm is not taking
advantage of—or does not have access to—the monitoring abilities that founders typi-
cally bring, and is instead leaning more heavily on the incentives to focus the CEO’s
efforts on shareholder interests. Because it is the founders’ expertise that enables strong
monitoring, without it the firm is subject to the same challenges that manager-controlled
firms confront (He, 2008). That is, CEOs are better equipped to use their informational
advantages over the board to lobby for greater pay (Bebchuk & Fried, 2003; Bebchuk,
Fried, & Walker, 2002; Dittmann & Maug, 2007) and reduce the extent to which pay is
tied to firm performance (Gomez-Mejia et al., 1987; Tosi et al., 2000). Reduced focus on
firm performance, in turn, should have negative consequences (Core, Holthausen, &
Larcker, 1999).7 Thus, we anticipate that:
7. A complementary view is that some founder owners incur unnecessary cost by overpaying their CEOs.
For instance, owners might overpay CEOs if they are worried about CEOs’ flight risk, or they might overpay
CEOs by bending to pressure by institutional shareholders. Both instances are indicative of unnecessary
costs and thus performance reducing waste.
January, 2017 81
Hypothesis 3: Higher CEO incentive compensation weakens the relationship
between founder ownership and firm performance.
Family owners similarly have the ability and incentive to directly oversee and monitor
hired CEOs. We predicted, however, that family owners will use more CEO incentives to
attract and retain nonfamily talent and to signal good governance. Although family owners
might offer relatively more CEO incentives, they only benefit financially when those CEO
incentives are used properly. Indeed, there is no advantage to the family if CEO incentives
play a largely symbolic role as they do in manager-controlled firms (Zajac & Westphal,
1995). This is so because family owners who are willing to give up the CEO position—and
thereby weaken their ability to pursue socioemotional wealth (Naldi et al., 2013)—will
want compensation for it (Chrisman et al., 2014). One way to do this is to offset lost socio-
emotional wealth with gains in financial performance (Chrisman et al.). Accordingly, once
family owners give up socioemotional wealth by hiring professional CEOs, we theorize
that family owners will not only offer greater CEO incentives but also make sure that hired
CEOs are held accountable in that their incentives are tightly bound to firm performance.
Family owners, like founders, can further ensure accountability because they have
considerable influence over the board. Family owners have deeply rooted social capital
within their firms (Sirmon & Hitt, 2003) and extensive tacit knowledge about the firm
(Carney, 2005), and, as large owners, they often sit on or have representatives on the
board and their input is sought with respect to critical policy decisions such as CEO com-
pensation (Anderson & Reeb, 2004; Voordeckers, Van Gils, & Van den Heuvel, 2007).
Accordingly, it seems unlikely that family owners would allow boards to untie hired
CEOs’ incentives from firm performance (e.g., by repricing options or adopting lower
performance targets) as is common among manager-controlled firms (Gomez-Mejıa
et al., 1987; Werner & Tosi, 1995). Indeed, because they have already given up some
socioemotional wealth, family owners should encourage increases in financial perform-
ance to help compensate for any lost socioemotional wealth from having a hired CEO
who is focused on firm performance. In line with agency theory research (Chrisman et al.,
2014), family owners’ effective use of higher CEO incentive pay is one step that they can
take to offset lost socioemotional wealth from hiring a nonfamily CEO.
Overall, whereas high CEO incentives are unnecessary for founder owners, family owners
need CEO incentives to (1) attract high-caliber CEOs and (2) signal shareholders about man-
agement’s performance focus. Because family owners have both the incentive (as owners who
want compensation for lost socioemotional wealth) and ability (because of deep knowledge
and experience) to make sure the CEO is unable to separate incentives from performance, they
will make sure that the incentives they offer are used to enhance firm performance. Therefore:
Hypothesis 4: Family ownership strengthens the relationship between CEO

incentive compensation and firm performance.
Data and Method
Sample and Data Sources

Our sample frame consists of Standard & Poor’s 500 firms. We manually collected
data on owners, board members, and top managers from corporate proxy statements for
the years 1994 through 2002. Proxy statements are the most accurate sources of corporate
ownership (Anderson & Lee, 1997; Dlugosz, Fahlenbrach, Gompers, & Metrick, 2006).

We read and recorded information from the text and footnotes because this is where cor-
porations reveal family ties among owners, managers, and board members. We also
employed various other data sources such as Hoover’s Handbook of American Business
and company websites to fill in missing data or resolve ambiguous cases. We then merged
our data set with the ExecuComp and Compustat databases. Finally, because our theory is
about hired CEOs, we removed firms from our sample if the founder or a family member
still served as CEO. Our final sample represents an unbalanced panel data set with 1,874
observations from 335 firms.
Dependent Variables
We ran two different analyses. In the Bayesian regression used to test Hypotheses 1
and 2, the dependent variable is CEO incentive compensation (He, 2008; Mehran, 1995),
calculated as the sum of long-term incentive plans, the Black-Scholes stock-option-value
estimate, and the value of restricted stock grants. In the Bayesian regressions used to test
Hypotheses 3 and 4, the dependent variable is Tobin’s Q, which is calculated as the mar-
ket value of equity plus the book value of debt divided by the book value of total assets
(Chung & Pruitt, 1994). It represents the value of a firm as determined by the equity mar-
ket, and thus resists earnings manipulations by CEOs (Villalonga & Amit, 2006). Tobin’s
Q is together with return on assets (ROA) the most often used dependent variable in cor-
porate governance research in general (McConnell & Servaes, 1990; Morck et al., 1998)
and compensation research in particular (Chung & Pruitt, 1996; Mehran). Tobin’s Q is
prefered over accounting performance measures (e.g., ROA) when the focus is on under-
standing how corporate governance affects shareholder wealth (Mehran). We logged both
dependent variables due to their skewed distributions.
Independent Variables
To test our hypotheses, two predictor variables were constructed. The variable foun-
der ownership is the percentage of stock owned by the founder or founder team where no
relatives of the founder(s) are involved as shareholders, board members, or top managers.
The variable Family ownership is the percentage of stock owned by the founding family
where at least one family member other than the founder is involved as owner, manager,
or board member.
Control Variables
Because many of the same factors potentially influence both dependent variables
(CEO incentive compensation and Tobin’s Q), we used a largely overlapping set of con-
trol variables that have been used in prior studies on executive compensation and firm per-
formance. We describe these variables in three groups: (1) other founder and family
influences, (2) governance (including CEO compensation) and CEO characteristics, and
(3) firm characteristics.
First, we control for nonownership forms of founder and family influence. Failure to
separate ownership effects from other forms of influence (e.g., owners being board mem-
bers) has been a critical concern in prior research (Chrisman et al., 2012; Villalonga &
Amit, 2006), and doing so is especially important in our study because our theory is
largely grounded in agency, which is concerned with how owners (principals) monitor
and incentivize their hired agents (e.g., Eisenhardt, 1989). As described above, we
January, 2017 83
controlled for any influence that founder or family member CEOs might have by remov-
ing them from the sample. We then control for Founder board presence and Family board
presence using indicator variables for each. We expect that both founder and family mem-
ber board presence reduces CEO incentives because such board members will monitor
CEOs directly, thus decreasing the need for heavy incentives (Eisenhardt). With regard to
performance, founder board presence should enhance firm performance, but family board
presence will not because of the potential for enhanced pursuit of socioemotional goals
by family board members. Controlling for family board membership is also important
because it is a potential indicator of a family’s socioemotional wealth (Deephouse & Jas-
kiewicz, 2013). Finally, we control for Family owner later generation. Gersick, Davis,
Hampton, and Lansberg (1997) explain that first-generation owner-managers are usually
followed by later-generation sibling partnerships and cousin consortiums. Because the
strength of family ties declines in later generations, later-generation family owners
become more interested in financial performance relative to socioemotional wealth. As a
result, later-generation family owners might be more inclined to use higher CEO incen-
tive compensation and tie it more closely to firm performance.
The second group of controls holds constant other sources of governance—including
CEO compensation—and CEO characteristics. CEO pay packages differ in their ratio of
base and incentive pay, and these differences carry different implications for CEO moti-
vation (Bloom & Milkovich, 1998). Thus, we control for CEO base pay, measured as the
CEO’s annual fixed salary plus cash bonus. We also control for CEO other pay. Hoskis-
son et al., (2009) show that other forms of pay, such as golden parachutes and signing
bonuses, have been growing over the last decades as compensation for various forms of
employment risks. As such, higher levels of other pay can come at the cost of incentive
pay because risk-averse CEOs want less risky pay contracts. However, other pay should
nonetheless be associated with better firm performance because it compensates the CEO
for employment-specific risks that might otherwise lead CEOs to choose suboptimal strat-
egies aimed at mitigating risks rather than maximizing firm performance. Both CEO base
pay and CEO other pay are log transformed. We control for Ownership by CEO measured
as the percentage of equity that is owned by the CEO. CEO ownership reduces the need
for incentives and strengthens the incentive to pursue firm performance goals (e.g., Brick,
Palmon, & Wald, 2006). We also control for Ownership by institutional shareholders
measured as the percentage of shares owned by institutional investors. Institutional share-
holders foster the use of CEO incentive compensation and focus on firm performance
(David, Kochhar, & Levitas, 1998). We then control for CEO duality using an indicator
variable depicting whether the CEO also serves as chairperson, and for CEO tenure meas-
ured as the number of years the CEO has held this position. Both CEO tenure and CEO
duality indicate higher discretion, which has been related to higher CEO compensation
(e.g., Barkema & Gomez-Mejıa, 1998). We also control for CEO compensation commit-
tee using an indicator variable depicting whether the CEO serves on the compensation
committee (e.g., Gomez-Mejıa et al., 2003). The CEO’s knowledge of the firm’s execu-
tives should enable the compensation committee to set more effective incentives for other
top managers, which should have a positive effect on performance (Cyert, Kang, &
Kumar, 2002).8 Finally, we accounted for the Number of board meetings per year. A
higher number of board meetings indicates an organizational crisis that frequently leads
to higher CEO compensation (Vafeas, 1999).
8. CEOs usually do not participate in committee meetings that determine their own compensation (Cyert
et al., 2002).

A third group of controls includes firm characteristics that have been identified as impor-
tant in prior compensation and/or governance studies (e.g., Carpenter & Sanders 2002;
Combs et al., 2010; Gomez-Mejıa et al., 2003). More established firms, as indicated by larger
Firm size (measured as the logarithm of total assets) and higher Firm age (measured as the
logarithm of years since the firm was founded) provide executives with better pay to com-
pensate them for the increased complexity that comes with managing larger and more estab-
lished firms (Beatty & Zajac, 1994; Cyert et al., 2002). CEO pay and firm performance can
be further enhanced by firm risk. Higher risks are expressed in higher Firm leverage, which
we measure as total debt divided by total equity, and in R&D intensity, which is defined as
R&D expenditures divided by total assets (Balkin et al., 2000; Brick et al., 2006). Also,
higher CEO compensation is common in firms that face higher Market risk—a firm’s Beta—
because CEOs want to be compensated for risks they incur (Gomez-Mejıa et al.; He, 2008).
Higher risks should also translate into higher firm performance in the long run. Next, we
account for ROA and Tobin’s Q in the CEO incentive compensation regression because bet-
ter performing firms pay their CEOs more (Barkema & Gomez-Mejıa, 1998). We also
include ROA in the performance regression because it could drive higher Tobin’s Q. More-
over, we include the variable Dividend yield in both analyses because annual dividend pay-
outs per share reduce available cashflows that could otherwise be used to pursue executives’
self-interested goals (Faccio, Lang, & Young, 2001). As such, higher dividend yields pro-
mote market confidence that may increase Tobin’s Q. Finally, we accounted for industry
effects by controlling for Industry mean CEO incentive compensation (based on two-digit
SIC codes) in the Bayesian regression on CEO incentive compensation and for Industry
mean Tobin’s Q t0 based on two-digit SIC codes in the Bayesian regression on Tobin’s Q t1.
The large number of control variables is a first step toward reducing the threat of
omitted variable bias (aka endogeneity). We take three additional steps. First, to ensure
the direction of causality, all independent and control variables are lagged by 1 year. Sec-
ond, to further control for the threat of reverse causality in the tests for Hypotheses 3 and
4, we include past performance (Tobin’s Q in t0) as a control in the regression predicting
firm performance in the subsequent period (Tobin’s Q in t1) (e.g., Brick et al., 2006).
Third, as described in more detail below, we use a two-stage instrumental approach when
testing Hypotheses 3 and 4 to reduce endogeneity concerns.
Data Analysis
We test our hypotheses using Bayesian panel fixed-effects regressions on the firm
level. Such fixed-effects models have the advantage that they control for unobserved
firm-specific factors, thus reducing endogeneity threats from firm-specific omitted varia-
bles. We use Bayesian analysis because it has strong small sample properties and is robust
to including large numbers of correlated control variables (Hahn & Doh, 2006; Kruschke,
Aguinis, & Joo, 2012). Bayesian regression is also robust to unbalanced panels such as
ours where not all firms are represented in each year. Indeed, it is for these reasons that
Bayesian analysis is becoming popular in many hard (e.g., Beaumont & Rannala, 2004)
and social (e.g., Allenby, Bakken, & Rossi, 2004) sciences, including marketing and
finance.
With respect to Bayesian’s small sample properties, although our overall sample is
not small, only about 4% of sampled firms have founder ownership and hired CEOs and
only about 9% have family ownership and hired CEOs, which results in a small number
of data points for each subgroup. Unlike traditional regression analysis, Bayesian analysis
has the power to detect effects within small subgroups and credibility intervals are not a
January, 2017 85
strict function of sample size (Kruschke et al., 2012). With respect to Bayesian’s robust-
ness to large sets of moderately correlated controls, this is important because while the
average management study has 6.6 control variables (not counting time and year indica-
tors) (Carlson & Wu, 2012) ours has 20. Including such a large set of control variables—
including common proxies for socioemotional wealth (i.e., having a family member on
the board) (Deephouse & Jaskiewicz, 2013)—reduces the danger of omitted variables
bias. Also, adding Tobin’s Q in t0 as a control to the performance regression predicting
Tobin’s Q in t1 does not pose a multicollinearity problem for a Bayesian regression.
Finally, family and founder ownership are correlated with board presence, so we needed
an estimation technique capable of separating these effects (without being influenced by
the order in which variables are entered). Not only is this critical to test our agency-based
theory about large owners but it is an important step forward in that prior research strug-
gled to disentangle the correlated effects that founders and families have in their different
roles as owners, CEOs, and board members (Chrisman et al., 2012; Villalonga & Amit,
2006).
The first step of Bayesian analysis is to formulate a priori beliefs about relationships
between variables, called prior distributions. Bayesian analysis then uses a likelihood
function derived from our fixed-effects model and data to update the prior distributions.
The result is a posterior distribution that describes updated beliefs about relationships in
the model. The choice of a prior distribution is important. For the distribution of effects
for each independent variable on the dependent variable, we assumed a normal distribu-
tion (mean is 0 and standard deviation is 1). This assumption is conservative because it
does not assume any direction of effect; it ensures that any evidence regarding observed
effects is independent from the specification of the prior distribution. As a robustness
check, we varied the means of the prior distributions from 20.5 to 0.5; this did not materi-
ally change our results.
The outcome of Bayesian analyses is a distribution of estimated coefficients (Hansen,
Perry, & Reese, 2004). The distribution of estimated coefficients, however, is a joint pos-
terior distribution, so we used a Gibbs sampling algorithm (Lancaster, 2004) to describe
the posterior distributions for each individual coefficient. The Gibbs sampling algorithm
takes 21,000 draws from the joint posterior distribution. After discarding the first 1,000
draws due to potential bias, the remaining 20,000 are used to describe the distribution of
the individual regression coefficients.
The output of Bayesian analyses is a distribution function for each coefficient (Hahn
& Doh, 2006; Hansen et al., 2004), which is different from single point estimates or confi-
dence intervals found in traditional, null-hypothesis testing regressions (Schwab,
Abrahamson, Starbuck, & Fidler, 2011). Bayesian researchers do not rely on tests of sta-
tistical significance, but instead use the posterior distribution of estimated coefficients to
describe the probability that effects on the dependent variable are positive or negative.
Our tables for the Bayesian regression results report the mean and the probability that an
overall effect is positive. Probabilities near 100% indicate very probable positive effects;
those near 0% indicate very probable negative effects. Although Bayesian researchers
avoid cutoffs to determine significance, we follow the conservative custom of reporting
effects as “meaningful” when the probability of an effect approaches 90% (positive) or
10% (negative). However, the 90% cutoff in Bayesian cannot be compared to p-values in
traditional “frequentist” analysis. The former is based on the distribution of all possible
parameters around the mean and provides a probability for the direction of each variable’s
effect and its strength whereas the latter is a statement about the probability that a particu-
lar parameter or effect would re-occur in repeated samples (Cohen, 1994; Kruschke et al.,
2012).

While Bayesian regression can handle a much larger set of control variables, endo-
geneity threats remain the same. A particularly difficult problem confronting research
in strategic management and entrepreneurship (where performance is the dependent
variable) is that firms take (or select) certain actions (setting CEO incentives in our
case) in the hopes of increasing performance, and if any of the reasons for selecting the
action are omitted from the regression, selection bias occurs (Hamilton & Nickerson,
2003; Shaver, 1998). To reduce the threat of endogeneity from selection bias, we per-
formed a two-stage procedure wherein, using Bayesian analysis, CEO incentive pay
was regressed on the control variables and six instruments, all depicting different
aspects of industry-level incentive pay.9 The predicted values were used in a second-
stage Bayesian regression to test Hypotheses 3 and 4. Proper instruments must be rea-
sonably strongly correlated with the endogeneous (selection) variable (CEO incentives)
and not correlated with the error term of the structural equation. As for Hanlon, Rajgopal,
and Shevlin (2003), the only acceptable instruments we could find involved industry-level
incentive pay.10
We did not perform a two-stage procedure when CEO incentives is the dependent
variable because (1) CEO incentives are not (clear) outcomes from other selection choices
(i.e., selection bias is theoretically not an issue), (2) reverse causality (another key source
of endogeneity that is partially controlled using a lagged dependent variable in the per-
formance regression) is logically unlikely (i.e., hired CEOs’ incentives should not materi-
ally change founders’ or families’ ownership), (3) we reduce the potential for omitted
variable bias by including every control we could identify that was used in prior research,
and (4) we could not find an instrument that satisfied the necessary validity criteria, and a
weak or invalid instrument can create more bias than not having an instrument (Larcker
& Rusticus, 2010; Roberts & Whited, 2012; Stock & Yogo, 2005).11 We do, however,
perform a robustness test that estimates how much an omitted variable would need to be
correlated with the endogeneous variable in order to affect the results (Larcker & Rusti-
cus). Our results indicate that the threat of a bias due to a yet untheorized omitted predic-
tor variable is very low.12
9. The hypotheses can be regarded as a moderated-mediation model in which founder and family owners
influence CEO incentive compensation AND moderate the effect of CEO incentive compensation on firm
performance. Although we do not explicitly hypothesize and test such a model, our two-stage instrumental
variable reduces the possibility that a moderated mediation relationship is behind our results.
10. The following six instruments were used: (1) mean industry incentive pay based on GICS codes (Execu-
Comp data item: INDDESC), (2) median industry incentive pay based on GICS (Global Industry Classifica-
tion Standards) codes (ExecuComp data item: INDDESC), (3) mean industry incentive pay based on SIC
codes (ExecuComp data item: SICDESC), (4) median industry incentive pay based on SIC code (Execu-
Comp data item: SICDESC), (5) mean industry incentive pay based on NAICS code (ExecuComp data
item: NAICSDES), and (6) median industry incentive pay based on NAICS code (ExecuComp data item:
NAICSDES).
11. We found a number of meaningful (i.e., they were correlated with the endogenous variable) but not valid
instruments (i.e., they were correlated with the error term) instruments. An overview of tested instruments is
available upon request from the second author.
12. We identified the most highly correlated variable with (1) founder ownership (i.e., founder board pres-
ence; correlation of 0.28) and (2) family ownership (i.e., family owner later generation; correlation of 0.72).
After adding founder board presence and family owner later generation to the regression of the log of CEO
incentive compensation, the regression coefficients of founder ownership and family ownership are not
weakened but even strengthened, suggesting that omitted variables that are even moderately or highly corre-
lated with the endogenous variable are unlikely to affect our results (see Larcker & Rusticus, 2010, for more
information on this procedure).
January, 2017 87
Results
Table 1 presents means, standard deviations, and correlations for all variables
(including industry incentive pay on which the instruments are based).
Table 2 shows the results of the Bayesian regression on CEO incentive pay. It reports
mean coefficients and, based on the posterior distribution, the probability that each effect
is positive. Bayesian regression analyses do not have a way to directly assess multicolli-
nearity, so we ran traditional fixed-effects regressions and assessed variance inflation fac-
tors. They showed moderate multicollinearity ranging up to 6.18 (4.04) for founder
(family) ownership in the performance regression (Model 2).
Results for control variables were consistent with prior research. Founder and family
board presence reduce hired CEOs’ incentives, as do later family generation owners. The lat-
ter can be explained because weaker kinship ties among later generation family members
mean a greater focus on financial returns and less need to signal such focus (Gomez-Mejıa
et al., 2011). Also, CEO base pay is positively related to CEO incentive compensation (Bloom
& Milkovich, 1998). Finally, long-tenured CEOs take less incentive pay (e.g., Cyert et al.,
2002). With respect to firm characteristics, older and larger firms offer more CEO incentive
pay. CEOs receive less incentive pay when market risks are high, presumably to shield their
compensation from risks that are out of their control (Zajac & Westphal, 1994). Although
ROA is negatively related to CEO incentive pay, Tobin’s Q is strongly positively related;
shareholders’ perceptions of future growth prospects far outweigh short-term accounting per-
formance in the design of incentive plans (Core et al., 1999; Jensen & Murphy, 1990). Finally,
incentives are higher for CEOs in industries where other CEOs receive high incentives.
Hypothesis 1 predicts that founder ownership has a negative effect on CEO incentive
pay. The hypothesis is supported with a 6.38% probability of a positive effect (b 5 23.
72). Hypothesis 2 predicts that family ownership has a positive effect on CEO incentive
pay. Supporting Hypothesis 2, family ownership has a 99.96% probability of a positive
effect on CEO incentive compensation (b 5 6.06).
Table 3 presents the results of the two-stage Bayesian regressions on firm perform-
ance. Given that we control for the prior year’s Tobin’s Q, the coefficients depict the
effect of the variable on the change in Tobin’s Q.
Coefficients for founder and family control variables are again consistent with
theory.13 Both founder ownership and founder board presence enhance firm performance
while family board presence lacks such a positive effect and family ownership reduces
firm performance (Miller et al., 2007; Villalonga & Amit, 2006). With respect to gover-
nance and CEO controls, better paid CEOs—in terms of both base and other pay—deliver
better firm performance. Moreover, institutional owners invest in firms with growing
Tobin’s Q, and CEO ownership spurs better firm performance. Also, the positive relation-
ship between CEO presence on the compensation committee and firm performance is con-
sistent with prior research showing that CEOs help to incentivize other top managers
(Cyert et al., 2002). Finally, in line with research showing that firms in crisis have many
13. One small (and statistically not meaningful) exception is that the main effect of CEO incentive compen-
sation on firm performance in Table 3 appears negative (b 5 0.01, probability of a positive effect is 21.01).
Given all of the controls, this effect probably reflects evidence that incentive compensation is subject to
diminishing returns. At some point, people are fully incentivized and the effect of additional incentives is
negative due to (1) waste (i.e., the added incentives are not needed, Frey & Osterloh, 2002), (2) “choking”
(i.e., extreme incentives make people nervous and prone to errors, Hambrick, Finkelstein, & Mooney,
2005), and (3) excessive risk taking (i.e., managers “swing for the fences” in hopes of attaining an excessive
reward; Carpenter, 2000).

Table 1
Correlations, Means, and Standard Deviations
Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
January, 2017
1 CEO incent. comp. (log) 7.29 2.62
2 Tobin’s Q (t11) (log) 0.32 0.78 20.04
3 Founder ownership 0.01 0.03 20.03 0.08
4 Family ownership 0.03 0.10 20.11 0.15 20.04
5 Founder board presence 0.13 0.33 20.07 0.23 0.28 0.08
6 Family board presence 0.16 0.37 20.11 20.00 20.04 0.40 20.02
7 Family owner later generation 0.09 0.28 20.05 0.13 20.05 0.72 20.05 0.55
8 CEO base pay (log) 7.31 0.75 0.22 20.13 20.05 0.01 20.12 20.05 20.02
9 CEO other pay (log) 2.17 2.48 0.09 20.11 20.03 20.06 20.11 20.06 20.04 0.21
10 Ownership by CEO 0.01 0.01 20.19 0.14 0.14 0.15 0.13 0.06 0.10 20.09 20.06
11 Ownership by inst. investors 0.14 0.12 20.01 20.03 20.01 20.19 0.00 20.12 20.19 20.05 0.02 20.07
12 CEO duality 0.76 0.42 0.06 20.20 20.09 20.18 20.31 20.20 20.13 0.13 0.05 20.03 0.02
13 CEO tenure 5.51 5.46 20.06 20.02 0.02 0.04 0.01 20.02 20.02 0.09 20.08 0.29 20.03 0.22
14 CEO comp. committee 0.04 0.20 20.05 0.06 20.01 0.13 0.06 0.04 0.04 20.03 20.01 0.03 20.08 20.03 0.07
15 Number of board meetings 1.93 0.34 0.08 20.06 20.03 20.09 0.00 20.09 20.06 0.09 0.13 20.13 20.09 0.05 20.14 20.02
16 Firm size 8.70 1.36 0.21 20.50 20.00 20.04 20.12 20.02 20.02 0.43 0.19 20.17 20.18 0.09 0.00 20.05 0.17
17 Firm age 4.05 0.89 0.10 20.32 20.18 20.00 20.33 0.11 0.07 0.24 0.09 20.16 20.13 0.22 0.03 0.01 0.11 0.37
18 Firm leverage 0.62 2.08 0.07 20.15 20.02 20.06 20.06 20.07 20.06 0.21 0.07 0.08 20.02 20.00 20.03 20.03 0.04 0.36 0.11
19 R&D intensity 0.03 0.05 0.04 0.39 0.02 20.02 0.16 20.09 20.02 20.18 20.11 20.01 0.02 20.07 20.10 20.03 20.00 20.37 20.37 20.13
20 Market risk 0.90 0.50 0.03 0.20 0.15 20.01 0.24 20.07 20.03 20.10 20.11 0.11 20.02 20.13 20.02 20.04 20.02 20.12 20.36 0.08 0.42
21 ROA 5.60 7.61 20.05 0.44 20.03 0.10 0.03 0.04 0.10 0.04 20.06 0.10 20.06 20.07 0.01 0.08 20.10 20.25 0.01 20.16 0.01 20.10
22 Tobin’s Q (log) 0.33 0.79 20.00 0.89 0.09 0.14 0.23 20.00 0.12 20.12 20.11 0.15 20.06 20.21 20.04 0.06 20.06 20.48 20.33 20.16 0.39 0.24 0.48
23 Dividend yield 1.58 1.60 0.00 20.34 20.08 20.07 20.25 20.00 20.01 0.04 0.10 20.15 20.06 0.14 20.05 0.01 0.18 0.23 0.41 0.07 20.29 20.40 20.07
24 Industry mean CEO incent. comp. 6.51 7.45 0.19 0.06 0.09 20.06 0.06 20.07 20.06 0.07 0.04 20.03 0.00 20.02 20.06 20.08 0.03 0.10 20.16 20.02 0.13 0.23 20.04
25 Industry mean Tobin’s Q 2.05 1.30 20.05 0.56 0.06 0.06 0.12 20.03 0.03 20.08 20.12 0.06 0.02 20.06 20.02 0.01 0.02 20.38 20.26 20.09 0.43 0.19 0.23
22 23 24
23 Dividend yield 20.37

24 Industry mean CEO incent. comp. 0.14 20.20
25 Industry mean Tobin’s Q 0.51 20.27 0.14
89
Notes: comp., compensation; incent., incentive; correlations > |.034| are significant at p < 0.05.
Table 2
Bayesian Fixed-Effects Regressions on Log of CEO Incentive Compensation
Mean effect Prob. of effect > 0 (%)
Independent variables
Founder ownership 23.72 6.38
Family ownership 6.06 99.96
Founder and family control variables
Founder board presence 21.23 0.12
Family board presence 20.50 12.01
Family owner later generation 21.74 0.00
Governance control variables
CEO base pay (log) 0.52 100
CEO other pay (log) 0.01 65.82
Ownership by CEO 221.46 0.00
Ownership by inst. investors 20.50 15.93
CEO duality 20.03 40.61
CEO tenure 20.07 0.00
CEO compensation committee 0.56 98.05
Number of board meetings 0.05 61.12
Firm control variables
Firm size 0.78 100
Firm age 0.80 96.83
Firm leverage 20.08 6.30
R&D intensity 21.26 28.05
Market risk 20.55 0.00
ROA 20.02 0.27
Tobin’s Q (log) 0.71 100
Dividend yield 0.06 84.00
Industry mean CEO incentive compensation 0.05 100
N obs. (firms) 1,874 (335)
Obs. per firm: min., mean, max. 1, 5.6, 9
board meetings, the number of board meetings relates negatively to firm performance
(Vafeas, 1999). With respect to firm characteristics, large firms’ Tobin’s Q grows at a
slower rate while older firms have higher values. Given that markets discount uncertainty,
it is not surprising that firms confronting high market risks have smaller Tobin’s Q values.
Finally, industry competitors’ performance co-varies positively.
Hypothesis 3 predicts that CEO incentive compensation weakens the relationship
between founder ownership and firm performance. The interaction between CEO incen-
tive compensation and founder ownership is strong and negative (b 5 20.15, probability
of a positive effect is 7.49%), supporting Hypothesis 3. The effect of the interaction
between CEO incentive compensation and family ownership on performance, in contrast,
is strong and positive (b 5 0.20, probability of a positive effect is 99.89%). As a result,
we find support for Hypothesis 4, which states that family ownership strengthens the rela-
tionship between CEO incentive compensation and firm performance.
Robustness and Additional Tests

We conducted numerous additional tests to ensure the robustness of our findings.
First, we ran traditional fixed-effects regression analyses. Although Bayesian analysis has
more power to detect effects among correlated variables in small subsamples, the

Table 3
Bayesian Fixed-Effects Instrumental Variables Regressions on Log of Tobin’s

Q t1
Model 1 Model 2
Mean Prob. of effect > 0 Mean Prob. of effect > 0

effect (%) effect (%)
Independent variables
Founder ownership 0.40 89.40 1.13 95.37
Family ownership 20.20 22.02 20.74 1.04
CEO incent. comp. 20.01 21.01 20.01 31.51
CEO incent. comp. 3 founder ownership 20.15 7.49
CEO incent. comp. 3 family ownership 0.20 99.89
Founder and family control variables
Founder board presence 0.23 100 0.24 100
Family board presence 20.03 27.01 20.03 32.62
Family owner later generation 0.08 90.26 20.02 39.53
Governance and CEO control variables
CEO base pay (log) 0.06 100 0.05 100
CEO other pay (log) 0.01 95.42 0.01 93.84
Ownership by CEO 1.49 98.91 1.87 99.73
Ownership by inst. investors 0.09 90.82 0.07 87.21
CEO duality 20.00 44.57 20.00 43.09
CEO tenure 0.00 57.52 0.00 59.64
CEO compensation committee 0.06 96.12 0.08 98.91
Number of board meetings 20.02 14.20 20.03 7.96
Firm control variables
Firm size 20.20 0.00 20.20 0.00
Firm age 0.21 100 0.22 100
Firm leverage 0.00 55.69 0.00 58.99
R&D intensity 0.08 60.39 0.07 59.17
Market risk 20.05 0.60 20.05 0.63
ROA 0.00 92.14 0.00 93.99
Tobin’s Q (in t0) (log) 0.25 100 0.24 100
Dividend yield 20.01 12.68 20.01 12.45
Industry mean Tobin’s Q (in t0) 0.15 100 0.15 100
N obs. (firms) 1,874 (335)
Obs. per firm: min., mean, max. 1, 5.6, 9
coefficient sizes should be comparable. Accordingly, we found very similar coefficient

sizes for all main variables in Bayesian and traditional regression analyses on CEO incen-
tive compensation and firm performance. Indeed, with one exception, all were identical
or different by a magnitude of less than 0.1.14 Second, we accounted for potential nonlin-
ear ownership effects by including squared terms for family and founder ownership.
These additional tests did not condition our original findings. Third, we employed dummy
14. The exception refers to the coefficient of founder ownership in the regression of CEO incentive compen-
sation. While the coefficient is 6.6 in the Bayesian regression analysis, it is slightly lower in the traditional
regression analysis (6.1).
January, 2017 91
variables for founder and family firms because a large number of prior studies had used
this approach (e.g., Miller et al., 2007). In line with theory stating that different sources of
family and founder influence have different effects (e.g., Chrisman et al., 2012; Villalonga
& Amit, 2006), we found that the use of dummy variables provides weaker results. Fourth,
we split our measure of CEO incentive compensation into two new variables: CEO stock
options and CEO restricted stock, and used them as alternative dependent variables.
Results show that the differences we found are due to stock options and not restricted
stock grants. Finally, because our dataset spans the Internet bubble (i.e., 1996–2000)
(Bhattacharya, Galpin, Ray, & Yu, 2009), our relationships of interest could have changed.
However, when we compare the correlations between CEO incentive compensation and
firm performance before (1994–1995; mean: 20.07), during (1996–2000; mean: 20.04)
and after the Internet bubble (2001–2002; mean: 20.04), we see that differences were
rather low, suggesting that the CEO compensation–firm performance link did not change
substantially. Similarly, we checked whether the average relationship between founder
and family owners on the one hand and CEO incentive compensation on the other hand
could have changed during or after the Internet bubble. However, the average correlations
appear to be very similar for the time period before (1994–1995), during (1996–2000), and
after the Internet bubble (2001–2002) (20.17 vs. 20.14 vs. 20.15). Moreover, we
checked whether the share of family and founder firms might have substantially changed
during or after the Internet bubble—for instance, as a result of founder or family firm sell-
offs. However, a comparison of samples of large U.S. firms before and after the Internet
bubble (e.g., Anderson & Reeb, 2003; Anderson, Duru, & Reeb, 2009; Anderson, Reeb,
Upadhyay, & Zhao, 2011; Miller et al.; Villalonga & Amit, 2006) suggests that the overall
proportion of these firms remained relatively constant; we also only observed a very small
reduction in the share of these firms from roughly 19 to 18% in the S&P 500 from 1996 to
2002.
Discussion
The most successful founder- and family-owned firms often go public and grow in
size and significance. Although these firms are no longer small, research shows that foun-
der and family owners continue to influence their firms’ strategies, corporate governance,
and performance (He, 2008; Miller et al., 2007, 2011). Understanding how founder and
families owners influence their firms is important because prior research shows that these
owners have very different goals that carry different consequences for shareholders,
employees, and other stakeholders (Gomez-Mejıa et al., 2011; Miller et al., 2011).
Founder- and family-owners often influence their firms by serving as CEOs, but these
CEOs must eventually step down and most are replaced with hired professionals. At this
point, achieving their goals requires that these owners use their status to influence board
and management decisions. One decision that large owners are known to influence is
CEO incentive compensation, perhaps because of its ripple effect on other decisions
affecting firm performance (e.g., Werner & Tosi, 1995). Although professionally man-
aged founder- and family-owned firms are common, theory has not yet been developed
explaining how these large owners and their different goal foci affect (1) hired CEOs’
compensation and (2) its link to firm performance. Our purpose was to develop and test
theory to help explain these relationships.
First, prior research demonstrated that CEO incentive compensation differs between
manager-controlled firms and those with large owners (e.g., Finkelstein & Hambrick,
1989; G omez-Mejıa et al., 2003; He, 2008; Wasserman, 2006), but it was unknown

whether known goal differences among large owners translated into differences in the
way they compensated their hired CEOs. Although prior theory suggests that founder and
family owners both have reasons to minimize CEO incentive compensation—founders
because of their focus on firm performance and their monitoring abilities and families
because CEO incentives might make it harder to achieve some socioemotional wealth
goals (e.g., a reputation for being environmentally friendly; Berrone et al., 2010)—our
theory and findings contradict the assumption that all large owners are the same. Specifi-
cally, we drew upon agency theory to predict that founder owners’ active monitoring puts
downward pressure on hired CEO incentives, and we drew upon signaling theory and
theory about professional CEOs in family firms (Chrisman et al., 2014; Chua et al., 2009)
to predict that both family owners and their hired CEOs push for above-average incentive
compensation. Results are consistent with our theory in that founder owners put down-
ward pressure on CEO incentives. A one standard deviation (3%) increase in founder
ownership relates to an average 11.16% drop of $681,876 in CEOs’ mean $6.11 million
in annual incentive compensation. As family ownership grows by one standard deviation
(10%), hired CEOs’ incentive pay grows to $9.81 million, which is about 60.6% above
CEOs’ mean incentive pay. Accordingly, it is misleading to treat founder and family own-
ers the same.
Second, our theory helps explain why founder and family owners differ according to
how CEO incentives affect firm performance. Knowing this is important because explain-
ing CEO compensation is more valuable when its connection with firm performance is
understood (Tosi et al., 2000; Werner & Tosi, 1995). We theorized that founder owners
will rely less on CEO incentives, and that failure to do so implies that the founder is
unavailable to furnish expert monitoring and that firm performance will decline. Results
are supportive in that high CEO incentives weakened the positive effect that founder own-
ers otherwise have on firm performance. Regarding family owners, we found that while
they use more CEO incentives, they effectively tie them to firm performance. Our find-
ings thus test and extend theory developed by Chua et al. (2009) and Chrisman et al.
(2014) that family owners use incentive compensation effectively to compensate for lost
socioemotional wealth from hiring nonfamily CEOs. Prior studies called for research into
whether and how the principal–principal agency problem can be mitigated in family-
owned firms (e.g., Villalonga & Amit, 2006). Our theory and results suggest that some
family-owned firms use CEO incentive pay to improve shareholder value (Aghion & Bol-
ton, 1992). Increasing shareholder returns bolsters the family’s influence with manage-
ment and the board and thus strengthens their control over the firm, which is a
foundational socioemotional wealth goal (Gomez-Mejıa et al., 2007).
Implications for Research on Founder-Owned Firms

Focusing on ownership allowed us to construct an agency-based explanation for how
ownership allows founders to mitigate agency problems using direct observation in lieu
of CEO incentives. Although the prediction that monitoring can substitute for incentives
is fundamental to agency theory (e.g., Eisenhardt, 1989) and well-grounded empirically
(e.g., Lippert & Moore, 1995; Rediker & Seth, 1995; Zajac & Westphal, 1994), Hoskisson
et al. (2009) observed that several forms of monitoring (including ownership concentra-
tion) are rising in intensity concomitantly with increases in CEO compensation, suggesting
a complementary ratcheting effect wherein increases in monitoring create pressure for
increased compensation (often in the form of incentives). Although it is an empirical ques-
tion for future research, our results suggest one possible resolution in that the type of
January, 2017 93
monitoring differentiates between when monitoring and incentives are complements ver-
sus substitutes. For example, independent board members (Baysinger & Hoskisson, 1990)
and many institutional owners (Ryan & Schneider, 2002) confront significant information
asymmetries that make them more dependent on incentives. Founders (and families), in
contrast, have deep tacit knowledge that reduces such asymmetries and makes them less
dependent. More generally, future inquiry into firm-level factors that differentiate between
when monitoring and incentives are complements versus substitutes appears warranted.
Our results are consistent with, and help explain, prior work showing that founder-
owned firms are among the best performing public firms (Miller et al., 2007). Prior
research shows that founder CEOs enhance performance (Wasserman, 2003). Our Bayes-
ian regression isolates founders’ influence as board members and owners and finds that
founders positively impact firms in both of these roles (see main effects in Table 3). The
firm thus benefits from founder ownership and from having active founders who use their
ownership power to monitor managers. However, when founders fail to monitor a hired
CEO effectively and boards use CEO incentives instead, firm performance suffers. When
juxtaposed with prior research showing that founders can become obsolete over time
(Boeker & Karichalil, 2002; Wasserman, 2003; Willard, Krueger, & Feeser, 1992), one
implication is that it is important to develop theory to explain when founders’ influence
reaches the point of diminishing returns.
Implications for Research on Family-Owned Firms

Recent research shows that family firms tend to conform to common industry stand-
ards; doing so confers legitimacy that family owners need to overcome shareholders’ con-
cerns that families will pursue socioemotional over financial goals (Gomez-Mejıa et al.,
2011; Miller, Le Breton-Miller, & Lester, 2013). By mirroring manager-controlled firms
in their use of CEO incentives, it seems that family owners use heavy CEO incentive pay
as a signal to garner legitimacy (Miller et al.). We theorized that such incentives are
important not only because do they signal to shareholders that their interests are protected,
but also because they signal to potential CEO candidates that they won’t be subjected to
pressure to capitulate to family demands for more focus on socioemotional wealth issues.
If this theory is correct, the implication is that high incentives are needed to attract top-
notch CEO candidates. As such, future inquiry might benefit by investigating whether the
high incentives we see here actually do increase the reputation and caliber of CEOs fam-
ily firms are able to attract.
Prior research on private firms shows that family owners sacrifice financial returns in
exchange for socioemotional wealth, especially when focusing on financial returns might
weaken the family’s control (e.g., Gomez-Mejıa et al., 2007). Among publicly listed
firms, however, a family’s control, and thus its power to protect socioemotional wealth, is
contingent on high share prices and hence satisfied shareholders. This raises a conundrum
for family owners in that they could either satisfy family members if they use a family-
member CEO, focus on socioemotional goals, and underperform as suggested by previous
research (Bloom & van Reenen, 2007; Naldi et al., 2013; Perez-Gonzalez, 2006), or they
can hire nonfamily CEOs, tie CEO incentive pay to firm performance, and achieve supe-
rior firm performance at the cost of some socioemotional wealth. The former is consistent
with evidence that, on average, large public family firms do not outperform (Miller et al.,
2007). The latter is in line with Chua et al.’s (2009) and Chrisman et al.’s (2014) proposi-
tion that family owners who hire nonfamily CEOs might overcompensate losses in socio-
emotional wealth by focusing on financial returns. It is also consistent with the idea that

the most important socioemotional wealth goal is maintaining family control (Gomez-
Mejıa et al.). These alternatives are reflective of our finding that, while some family own-
ers hire CEOs and offer strong incentives that are tied to performance, the mere presence
of family ownership reduces firm performance (i.e., see main effects in Table 3). One
implication is that there are benefits to further describing the characteristics of family
firms that are focused on firm performance and maintaining control versus pursuing other
socioemotional wealth goals. More generally, future research should not only look at
direct effects of family owners on firm performance but also analyze family owners’ con-
tingent effect upon the relationship between governance mechanisms (e.g., CEO compen-
sation) and firm performance.
Our results also have implications for theory about how families affect firm perform-
ance, much of which uses dummy variables depicting “family” to draw the conclusion
that family firms underperform. Despite numerous appeals to account for heterogeneity
among family-owned firms (e.g., Chrisman et al., 2012; Deephouse & Jaskiewicz, 2013;
Villalonga & Amit, 2006), disentangling family influences and testing their different
effects on organizational outcomes remain scarce. Our analysis enabled us to isolate the
impact of ownership from other ways family members impact firms (i.e., as managers or
board members), and to investigate how ownership operates in family firms with hired
CEOs. Results reinforce the need to account for heterogeneity among family firms.
Whereas family ownership has a negative effect on performance when isolated using
Bayesian regression (see main effect in Table 3), these effects dissipate and turn positive
when coupled with high CEO incentives. Because Bayesian regression allows researchers
to isolate different ways that families (and founders) impact firms, perhaps it would be
worth revisiting prior research that did not make this distinction to investigate whether
ownership effects on key outcomes differ from other sources of family influence (i.e., as
managers or board members).
Practical Implications
Our study’s practical implications pertain mostly to shareholders. Prior research
could be interpreted to imply that founder control means that a firm is a potentially strong
investment (e.g., Miller et al., 2007). Our results concur except that founders no longer
appear beneficial in firms with hired CEOs who receive the same kind of incentives found
at manager-controlled firms. Such incentives indicate that the board is relying on incen-
tives to focus the CEO’s attention and is not benefiting from a founder’s expert monitor-
ing. CEOs without such founder monitoring can separate pay from firm performance
(Gomez-Mejıa et al., 1987). In contrast, caution regarding investments in family firms is
less once families hire external CEOs and tie their compensation to firm performance. At
that point, family ownership appears to be an asset.
Conclusion
We began this article with the observation that some of the most successful founder
and family firms have grown large and represent about a third of the publicly listed firms
in the United States. While prior research shows that large owners offer fewer CEO incen-
tives and tie those incentives more closely to firm performance than do manager-
controlled firms (e.g., Gomez-Mejıa et al., 1987; Werner & Tosi, 1995), treating all large
owners alike ignores important goal differences between large founder and family
January, 2017 95
owners—goal differences that imply that these firms’ shareholders confront different
principal–principal agency problems. Our theory explains how these owners’ different
goal foci translate into differences in the way they compensate hired CEOs and tie CEO
incentive pay to firm performance. Consistent with predictions from agency and signaling
theories, founder owners rely less on CEO incentives and their firms perform better when
doing so. Family owners, in contrast, employ more CEO incentive compensation and tie
it closely to firm performance. Our theory and results provide further evidence that not all
large owners are alike and, we hope, inspire others to further examine ways that these
owners influence their firms.
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Peter Jaskiewicz is an associate professor and the CIBC Distinguished Professor in Entrepreneurship
and Family Business at the John Molson School of Business, Concordia University, Montreal, QC,
Canada.
Joern H. Block is a Full Professor at the Universit€at Trier and Erasmus University Rotterdam, Uni-
versitaetsring 15, 54296 Trier, Germany.
James G. (Jim) Combs is the Dr. Phillips Chair of American Private Enterprise in the College of
Business at the University of Central Florida, Orlando, FL 32816, USA.
Danny Miller is the director, Family Business Research Center, HEC Montreal and chair in family
enterprise and strategy, University of Alberta.
This research has been supported by a research grant of the Social Science and Humanities Research
Council (SSHRC) of Canada and by the Deutsche Forschungsgemeinschaft through the SFB 649
“Economic Risk” and the individual grant “Long-term Orientation in Family Firms.” Furthermore, we
would like to thank David Balkin, Dev Jennings, Jennifer Jennings, Royston Greenwood, Lloyd Ste-
ier, and Thomas Zellweger for their helpful comments and suggestions on an earlier draft of the
article.
January, 2017 103

Jaskiewicz Et Al 2017 The Effects of Founder and Family Ownership On Hired Ceos Incentives and Firm Performance

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C 2015 Baylor University

The Effects of Founder

74 ENTREPRENEURSHIP THEORY and PRACTICE

Theory Development and Hypotheses

Ownership, CEO Compensation, and Firm Performance

76 ENTREPRENEURSHIP THEORY and PRACTICE

CEO Incentive Pay in Founder-Owned Firms

Hypothesis 1: Founder ownership has a negative effect on hired CEOs’ incentive

CEO Incentive Pay in Family-Owned Firms

78 ENTREPRENEURSHIP THEORY and PRACTICE

Hypothesis 2: Family ownership has a positive effect on hired CEOs’ incentive

CEO Incentive Pay and Firm Performance

80 ENTREPRENEURSHIP THEORY and PRACTICE

Hypothesis 4: Family ownership strengthens the relationship between CEO

Data and Method

Sample and Data Sources

82 ENTREPRENEURSHIP THEORY and PRACTICE

84 ENTREPRENEURSHIP THEORY and PRACTICE

86 ENTREPRENEURSHIP THEORY and PRACTICE

88 ENTREPRENEURSHIP THEORY and PRACTICE

Correlations, Means, and Standard Deviations

23 Dividend yield 20.37

Bayesian Fixed-Effects Regressions on Log of CEO Incentive Compensation

Mean effect Prob. of effect > 0 (%)

Robustness and Additional Tests

90 ENTREPRENEURSHIP THEORY and PRACTICE

Bayesian Fixed-Effects Instrumental Variables Regressions on Log of Tobin’s

Mean Prob. of effect > 0 Mean Prob. of effect > 0

coefficient sizes should be comparable. Accordingly, we found very similar coefficient

92 ENTREPRENEURSHIP THEORY and PRACTICE

Implications for Research on Founder-Owned Firms

Implications for Research on Family-Owned Firms

94 ENTREPRENEURSHIP THEORY and PRACTICE

96 ENTREPRENEURSHIP THEORY and PRACTICE

98 ENTREPRENEURSHIP THEORY and PRACTICE

He, L. (2008). Do founders matter? Journal of Business Venturing, 23(3), 257–279.

Lancaster, T. (2004). An introduction to modern Bayesian econometrics. Oxford, UK: Blackwell

100 ENTREPRENEURSHIP THEORY and PRACTICE

January, 2017 101

102 ENTREPRENEURSHIP THEORY and PRACTICE

January, 2017 103

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