How Do Non-Family CEOs Adapt to the Risk Preferences of Family Business Owners? Investigating the Role of Vesting Grants

Abstract

This study clarifies how family firms use the vesting provision of incentive grants and calibrate the interests of non-family executives so that they merge better with the firms’ interests. Given the risks that family firms confront when they are considering strategic decisions, this study finds that family-owned firms provide more risk-based incentives to their non-family executives, primarily when the firms are performing below their aspirational level. Moreover, these firms rely more often on relative performance measures to assess the efficacy of their non-family executives as their performance deteriorates. These findings stand in stark contrast with the literature on this topic, which suggests that firms always use risk-based incentives and absolute performance measures to reward their executives regardless of the firms’ performance.