Nonfamily Manager Involvement,Compensation Incentives And Firm Innovation Output

As important actors of the private economy,family business is witness to development and prosperity of Chinese market economy.Economic development is accompanied by the optimization of the economic structure and the replacement of old growth drivers with new ones.Innovation is a strategic tool of such replacement as well as to achieve the long-term survival of a company.The importance of innovation is self-evident for family businesses with the will to grow forever.Due to the specialized and high-risk nature of innovation projects,the limited capital and competence endowment within family businesses may be barriers to innovation.In order to gain external capital and advanced managerial experience,family businesses are under the normative pressure of professionalization,resulting in more and more family businesses bringing in external professional nonfamily managers to promote professionalism.While nonfamily managers bring the agency benefits of competence and effort to the firm,it also means that there are agency costs in terms of conflicting goals and loss of family control for the controlling family.Therefore,the analysis of the influence of nonfamily managers' involvement on the firm innovation appears to be an important approach to understand professionalism and to explore effective professionalization forms.In addition,with the constantly increased agency costs associated with the involvement of nonfamily managers,how to inspire the potential of their knowledge and efforts constantly,thus better implementing innovation becomes another issue of concern.According to Chandler's proposition,the family business will transform to a managerial business inevitably with the involvement of salaried managers.Then why are there so few cases of transformation from family businesses to highly professionalized managerial businesses in reality? According to the research on the innovation output of family businesses,family members working in the firm have easier access to knowledge and social capital in favor of innovation.Family-controlled firms have a high degree of autonomy in decision-making and a flexible organizational structure.These characteristics of family governance are also important factors for family firms to obtain advantages in innovation.Thus,why do family firms still go to great lengths to promote professional management by bringing in nonfamily managers given that professionalization characterized by introducing nonfamily managers may weaken the above-mentioned family characteristics? It is clear from this dilemma that neither highly professionalized management nor full family control would be the best choice for family firms to cultivate their innovative capabilities.In order to resolve the above theoretical conflicts,this thesis raises the following three questions from the perspective of agency theory: First,given the current social normative pressure of professionalization,how would nonfamily managers affect the innovative output of the firm? Is it possible for non-family executive involvement and family control to be reconcilable? Second,in order to motivate executives more effectively,the non-family executive compensation incentive serves as a way to control agency costs in the thesis.The thesis analyzed the effectiveness of different forms of the compensation incentives in the light of the characteristics of family firms.Third,the thesis illuminated the impact of different forms and combinations of executive compensation incentives on corporate innovation output,aiming to seek appropriate and effective compensation incentive schemes for management practices.First,as the proportion of nonfamily managers changes,the agency costs and agency benefits resulting from the involvement of nonfamily managers also change accordingly.After analyzing data on listed family firms in China,the thesis finds that the proportion of nonfamily managers has an inverted U-shaped relationship with the firm innovation output,which means that as the proportion of nonfamily managers rises,the firm innovation output tends to rise firstly and then fall.In addition,such relationship also needs to take the influence of family control into consideration.When family members control the firm,the inverted Ushaped curve between the proportion of nonfamily managers and the firm innovation output becomes flatter while the turning point shifts to the right.That is,family control can delay the arrival of the turning point at which the marginal net benefit of introducing nonfamily managers becomes zero,as well as slow down the rate of declining in net benefits after reaching the peak.Second,given that the professionalization of nonfamily managers' involvement have influence on firm innovation,how to cultivate the potential of nonfamily managers through an agency cost control system of compensation incentives,in condition that the non-family executive involvement increases the agency costs?The thesis develops a principal-agent model and a three-stage game model,finding that nonfamily managers have higher pay-performance sensitivity;and that nonfamily managers' fixed pay and pay for performance are positively related to the degree of risk-taking,i.e.the higher the fixed pay and pay for performance of nonfamily managers,the more willing executives are to take risks in innovation.This study is a theoretical validation of the effectiveness of the executive incentive form.Third,different forms of the executive compensation incentive imply different incentive strengths and durations.Therefore,the thesis analyses the impact of different forms of the executive compensation incentive on the firm innovation output by consolidating data on the compensation incentive of nonfamily managers of listed family firms in China.The result shows that both of cash and equity incentives of nonfamily managers is beneficial to the innovation output,and that the cash and equity incentive has a complementary effect on the innovation output.In addition,in family firms controlled by family members,the effect of cash compensation for nonfamily managers on the innovation output is weaker.However,the family top executive does not affect the contribution of the equity incentives for nonfamily managers to the innovation output.Such results suggest that the discretion resulting from equity incentives is not affected by the family's controlling authority.Even if the top executive is a family member,the equity incentive payout and the effectiveness of the incentive does not decrease out of family members' trust in nonfamily managers.Finally,the thesis selects Midea Group as the research target to do a case study.Based on a comparison of agency benefits and agency costs,supplemented by an analytical framework of executive willingness and ability,the thesis attempts to make an in-depth interpretation of the relationship among Midea's professionalization process,executive compensation incentives and corporate innovation output.The results of the case study show that executive competency driver and proactive empowerment by the founders serve as guarantees to enhance the innovation level of Midea Group.In addition,diversified forms of executive compensation incentives help to increase the willingness of nonfamily managers to innovate.The case study interprets the findings of the thesis dynamically and comprehensively.The thesis has three contributions mainly.First,the thesis studies in depth the influence mechanism of nonfamily executive proportion on corporate innovation output,updating the existing research on the value effects of nonfamily managers involvement.Unlike existing studies that have found a linear relationship between nonfamily managers and the firm behavior,the thesis finds that the proportion of nonfamily managers in the executive team has an inverted U-shaped relationship with the innovation output.The linear relationships of previous studies may be due to sample selection bias or variations in theoretical perspectives,resulting in focusing on only the left or right part of the inverted U-shaped curve,thus lacking a comprehensive understanding of how nonfamily managers influence the firm behavior.Second,the incentive effects of different forms of compensation incentives for nonfamily managers are deconstructed from a holistic perspective.The thesis manually consolidates data on the different forms of incentives for nonfamily managers in Chinese listed family companies and uses model extrapolation,empirical research and case studies to analyze the effectiveness of different forms and combinations of incentives for family executives comprehensively,and provides recommendations for enhancing the effectiveness of non-family executive compensation incentives.The results show that effective non-family executive compensation packages should combine cash and equity incentives and reduce the pay gap properly.Third,the thesis challenges the assumption that professionalization and family management are mutually exclusive.The literature on family business professionalization and family management seem to be dogmatic that professionalization and family management are mutually exclusive,i.e.the professionalization process of family enterprises does not allow for the existence of family management factors.Chinese family business professionalization should be conducted gradually according to own characteristics.The term "entrepreneur's enterprise" is still consistent with the status quo of Chinese family enterprises in the long run.The professionalization process should be carried out under the premise of maintaining family control.The empirical studies and case study in the thesis finds that the introduction of nonfamily managers while maintaining family control,as well as integrating the competencies of nonfamily managers with the governance and management advantages of family control,are reasonable measures to adapt to the current situation of Chinese family businesses professionalization.