A large number of family firms employ nonfamily managers. This article analyzes the optimal compensation contracts of nonfamily managers employed by family firms using principal-agent analysis. The model shows that the contracts should have low incentive levels in terms of short-term performance measures. This finding is moderated by nonfamily managers' responsiveness to incentives, their level of risk aversion, and measurement errors of effort related to short-term performance. The model allows a comparison between the contracts of family and nonfamily managers. This comparison shows that the contracts of family managers should include relatively greater incentives in terms of short-term performance measures. A number of propositions regarding the compensation of nonfamily managers employed by family firms are formulated. The implications of the model for family business research and practice are discussed.

, , , ,
doi.org/10.1177/0894486510394359, hdl.handle.net/1765/25627
Family Business Review
Erasmus Research Institute of Management

Block, J.H. (2011). How to pay nonfamily managers in large family firms: A principal-agent model. Family Business Review, 24(1), 9–27. doi:10.1177/0894486510394359