University of Western Ontario
Family firms are the predominant form of business organization throughout the world, yet little is known about the types of incentive problems these firms face and how they are resolved. This paper examines a particular incentive problem, the dampening of promotion incentives, in family firms in which children succeed parents as president, chief executive officer, or chairman. The relatively young age of the successor child, combined with the family's voting control, diminishes the promotion incentives for non-family, senior managers in the firms. This has implications for the level and structure of executive compensation in these firms.