Abstract
This paper uses data from the World Banks Enterprise Surveys to assess the impact of family ties on managerial compensations in selected African SMEs. The results suggest that while managers who are related to the owners of an enterprise receive higher performance-based compensations than professional managers, their compensations are less sensitive to firm performance than that of professional managers. These findings parallel those of Chinese enterprise managers identified by Cai et al. (Rev Econ Stat 95(3), 850–867, 2013). This suggests that family relations play a significant role in compensation schemes for enterprises in developing and emerging markets and that differential treatment exists between family and non-family managers.
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Notes
Of course the manager can turn the contract down in which case the two go their separate ways and nothing happens.
Notice that when \(\delta = 0\) (trust is zero), the payoffs revert to the standard principal-agent model that corresponds to a professional manager.
Differentiation yields \(\frac{\partial \beta ^{*}}{\partial b} = \frac{8(1-\delta )^{2}\lambda \gamma \sigma ^{2}}{((1-\delta )^{2}b^{2} + 4\lambda \gamma \sigma ^{2})^{2}}> 0\).
The list of countries with firms included is as follows. Numbers in parentheses indicate number of firms from the country in the sample: Namibia (8), Burundi (6), Tanzania (10), Uganda (22), Guinea (10), Botswana (4), Angola (21), Swaziland (4), Mauritania (10) and Rwanda (10)
For robustness, managers are later defined to include the second-layer chain of command that includes supervisors.
While it would be useful to know the extent of family relations (nuclear or not), the survey data do not provide further details. However, it is sufficient to know whether owners and managers are related since extended families still feature prominently in many African societies, and kinship sometimes goes beyond the nuclear family setting.
Due to the small sample size, the model does not control for firm-specific effects. However, the use of firm size as a control variable is likely to account for any firm-idiosyncratic effects.
Further estimation using fixed salary as a dependent variable was performed (as a form of falsification test), and interestingly, performance did not have a significant effect on fixed salary (these results are not reported, but can be provided upon request.
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Acknowledgments
I thank the associate editor Erik E. Lehmann, an anonymous referee, Ousman Gajigo, Christa Jensen and Adam Pellillo for helpful comments.
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The views expressed here are the opinions of the author only and do not necessarily represent those of the African Development Bank.
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Bempong Nyantakyi, E. Family ties, firm performance and managerial compensations in African SMEs. Small Bus Econ 46, 493–501 (2016). https://doi.org/10.1007/s11187-015-9692-7
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DOI: https://doi.org/10.1007/s11187-015-9692-7