The relationship between executive compensation and dividend policy, performance, and corporate governance in closely-held firms

This paper examines how profitability, dividend policy and the corporate governance of closely-held companies are related to executive compensation. The main finding is that that in spite of the fact that controlling shareholders, and the executives they nominate to represent them, have the ability to exploit firms' resources at the expense of minority shareholders, their incentive to do so is lower when their ownership exceeds 75% of the voting power. Specifically, in closely-held firms in which the controlling shareholders hold more than 50% and less than 75%, the incentive to prefer higher compensation and avoid paying dividends is greater than that in companies in which major shareholders hold more then 75% of the firm's equity. For the latter, since they the vast majority of firm's shares is held by them, the firm is to a large extent more private than public. In such case, the incentive to exploit minority shareholders is small. Indeed, in companies in which the voting power of controlling shareholders exceeds 75%, their profits are higher, the compensation paid to their executive is lower, and they appear to have the tendency to share more dividends in comparison with other companies.