Impact of family involvement on strategy and CEO compensation: Evidence from the Indian pharmaceutical industry

As widely known and well established, strategic decision-making at family firms is an interface between business interests and family considerations. The purpose of this paper is to understand the underlying basis of decision-making in setting corporate strategy and designing chief executive officer (CEO) compensation at founder- vis-à-vis descendant-led family firms in the Indian pharmaceutical sector.

A sample of 106 BSE-listed pharmaceutical companies have been studied over the period 2012–2017 resulting in a total of 636 firm-year observations. Impact of family involvement in business (FIB) on corporate strategy and CEO compensation has been analysed by constructing multivariate panel data regression models. To deal with the problem of endogeneity, Arellano-Bond (1991) dynamic panel data estimation procedure has moreover been conducted.

Supporting stewardship theory, founder-owned and governed firms have been found to favour “growth” strategy and distribute “conservative” executive pay, thereby exerting a positive moderating impact on the strategy-compensation linkage. On the contrary, descendants/second-generation entrepreneurs have put forth a “conservative” stance for growth and innovation, and have rather been observed to favour a “liberal” compensation policy, thereby showcasing the application of behavioural agency theory.

The research is a novel attempt to unravel the interaction between corporate strategy and CEO compensation in a family firm backdrop carried out in the context of an emerging economy. The study, moreover, adopted an all-encompassing definition of FIB (ownership, management and governance).