CEO Compensation Contracts in Family Versus Nonfamily Firms: The Use of Nonfinancial Performance Measures

ABSTRACT Research Question/Issue This study examines the association between ownership type—family versus nonfamily firms—and CEO family status—family CEO versus professional CEO—and the use of nonfinancial performance measures (NFPMs) in CEO compensation contracts. Research Findings/Insights Using a sample of 3143 firm‐year observations of S&P 500 nonfinancial firms from 2010 to 2018, we find that family firms place a significantly lower weight on NFPMs in CEO compensation contracts than nonfamily firms. Within family firms, we find that a significantly lower weight is placed on NFPMs in compensation contracts for family CEOs relative to those for professional CEOs. Furthermore, additional tests indicate that the negative association between family ownership and the weight placed on NFPMs is stronger (weaker) in firms with low (high) stakeholder visibility. Theoretical Implications We advance the academic literature on the selection of performance measures in compensation contracts by providing insight into the implications of family ownership and of a CEO's family ties for the use of NFPMs. The results suggest that because family firms have a good ability and a strong incentive to directly monitor and control their CEO's actions, NFPMs are less needed in CEO compensation contracts as a means to align goals. Furthermore, the effects we document are even stronger when the CEOs of family firms are family members. Practitioner/Policy Implications The results imply that while family firms may not need a high weight on NFPMs in CEO compensation contracts to monitor their CEOs' actions, goal alignment, and internal communication of nonfinancial targets, they may still need them for communication and signaling purposes when exposed to external stakeholder monitoring.