Do Family Firms Have Incentive Problems?

A new Harvard Business School working paper by scholars Oriana Bandiera, Luigi Guiso, Andrea Prat, and Raffaella Sadun examines whether family firms pay differently than companies that have dispersed ownership. They find that, "Family firms use contracts that are less sensitive to performance; these contracts attract less talented and more risk averse managers; these managers work less hard, earn less, and display lower job satisfaction." Why do family firms offer lower-powered incentives to managers? The authors argue that they do so because they want to preserve family control over the business. Thus, they do not want to provide a high degree of equity upside to professional managers who are not family members. They conclude with a thought about how large concentration of family firms in a country may affect overall economic performance. The authors write, "Economies where family firms prevail because of institutional or cultural constraints are also economies where the demand for highly skilled and risk tolerant managers languishes." The underlying paper may be a tough slog for some to read, as it is highly academic. However, family business owners should take a look, as the conclusions surely are relevant to them.