The Impact of Family-owners Trust on Non-family CEOs Compensation in Korean Large Business Groups

Abstract

From an integrated agency theory-trust perspective, this study investigated how a family owners trust toward non-family executives influences their compensation in family-controlled firms. In this study, we differentiate two forms of trust, cognitive-based and affect-based trust, and hypothesize that the incidence of managerial opportunism may vary depending on distinct foundations of trust. Specifically, we argue that cognition-based trust is positively correlated with non-family CEOs compensation, while the affect-based trust is negatively related to non-family CEOs pay. Using 2013 compensation data of 94 non-family CEOs in 75 family-controlled firms in Korea, our hypotheses are supported. Agency theory may be improved by incorporating a principals trust toward an agent and the effect of this trust on contracts with an agent.