Bifurcation Bias in Executive Compensation System and Family Firm Performance

Family firms tend provide preferential treatment toward family members vis-à-vis nonfamily members. Prior studies defined such practices as bifurcation bias, and suggested that bifurcation bias can trigger nonfamily members’ perceptions of unfairness, and thus is detrimental to family firm performance. Drawing upon a social categorization approach to distributive justice, we extend this line of research by suggesting not all bifurcation bias practices have the same impact on firm performance, given that nonfamily member may perceive some bifurcation bias practices as unfair, whereas view other bifurcation bias practices as just. With data on family firms publicly traded in China, we found that bifurcation bias in salary compensation and bifurcation bias in equity compensation have divergent impacts on family firm performance.