Hierarchical Inconsistency Among Family-Member Top Leaders and Nonfamily Executives' Compensation Levels: Evidence from Chinese Family Firms

Abstract In this study, we propose hierarchical inconsistency among family-member top leaders as a novel structural reason for nonfamily executives' high compensation in family firms. Hierarchical inconsistency among family-member top leaders is observed when the head in the formal business hierarchy is not ranked the highest among family-member executives and directors in the informal family hierarchy. We argue that this structure triggers contestations between the heads of the two hierarchies, adding complexity and challenges to nonfamily executives' jobs. Family firms with hierarchical inconsistency among family-member top leaders need to offer higher compensation to make up for the demanding features of these professional managers' work. The positive relationship between hierarchical inconsistency and nonfamily executives' compensation is weaker when the proportion of female family-member executives and directors is high and when the formal head's tenure is long. We use data from publicly listed family firms in China to test our arguments. Our study contributes to family business research by suggesting how the interplay between family relationships and formal organizational structures influences job features and compensation decisions.