CEO Compensation in Founder-Controlled Firms: A Comparison Between Family CEOs and Non-Family CEOs

When the founder is no longer the CEO of the firm he controls, he can entrust the position either to a family member or to a professional non-family CEO. Our study examines how founder-controlled firms compensate family CEOs versus non-family CEOs. Using regression analyses on a sample of large Canadian firms listed on the Toronto Stock Exchange (S&P/TSX) over a 7-year period (2002 to 2008), we find that the total compensation of family CEOs is lower than that of non-family CEOs, especially when the founder does not have excess voting rights. On the other hand, there is no difference in the incentive component of the compensation of family and non-family CEOs. Overall, our results tend to support the “optimal contracting” approach as opposed to the “rent extraction” approach in explaining founders’ behaviour in regard to CEO compensation when no excess-voting rights are involved.