Investor protection and CEO compensation in family firms

Abstract

This paper investigates the relationship between investor protection and CEO pay in family-controlled corporations. Using a panel of 986 firm-year observations from 11 EU countries, we show that the lower the investor protection, the higher the compensation of the CEO. The sensitivity of pay to the institutional context is higher for a family CEO than a professional CEO, a result that corroborates the hypothesis that CEO compensation contracts in family firms are influenced by familiar connections. Overall, these results are more consistent with the hypothesis of rent extraction than with the perspective of optimal remuneration contracts.