These days, lots of family firms are managed by non-family managers, especially in Germany where executives such as Hans Van Bylen, the newly-appointed CEO of family-controlled chemicals giant Henkel, are entrusted with running vast, complex companies that no family member has the skills to.
But when outsiders come into family firms they face a whole host of problems. For example, when the family owns the business, how much power does an outsider, even if they are the CEO, really have? And do they want to simply do the bidding of the founder? Or the founder’s descendants?
Also, if the company is private, how are non-family managers to be fairly rewarded for their work? They can’t be compensated in shares. Even worse, families often resist performance-related pay on the grounds that their aims are not purely about maximising profits.
Families often pursue “socioemotional wealth”, aims such as maintaining family harmony and keeping the business (and profits) to themselves. So they are often risk-averse and take “wealth-preserving” decisions.
Also, they might feel social pressure to do certain things such as pay their workers - who are also their neighbours and friends - high wages, and to resist offshoring production. Such decisions might mean lower profits. The family is willing to accept that, and doesn't want to create a profits-focused culture, which performance-related pay does.
Some non-family managers flourish in this situation (such as Patrick Thomas, who spent his entire working life in family firms, becoming CEO of Grant & Sons, Lancaster and Hermes, and who we interviewed here). Others run screaming for the hills.
So how do family firms balance the needs and desires of the family, and their professional managers?
Oddly, and contrary to the widespread assumption, a study by Pascal J. Engel, Andreas Hack and Franz W. Kellermanns found that listed German family firms are actually more likely to adopt performance-related pay than other firms, and that those with two or more family members holding significant amounts of shares were even more likely than founder-owned firms to do so.
We suggest that family firms and specifically [firms with two or more family shareholders] will sacrifice their tendency to avoid [performance-related] pay to signal conformist behaviour vis-a-vis shareholders and stakeholders through their outside directors’ pay mix - a matter directly connected with the owner-owner agency problem and thus a relevant parameter to alleviate stakeholders’ suspicion.
...[a] family firm’s and especially a public family firm’s reputation is closely linked with family image and thus of paramount importance… A non-conformist behaviour, such as avoiding the adoption of performance-related pay despite its recommendation by the German Corporate Governance Codex, would damage this image.
Obviously families do this not simply to look good, but to remain attractive to the best non-family managers. And, ultimately, that allows them to keep control. As the authors write, the firms in their sample adopted performance-related pay “although this decision is contrary to their genuine interests”, it ensures “the support from non-family stakeholders they need because it allows the family to maintain control and continue their pursuit of socioemotional wealth.”
The upshot? That bringing in generous performance-related pay could be a good tactic for other family firms worried that bringing in outside managers means a loss of control - and more importantly the soul - of their business.
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