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Short summary
Family firms often treat family and non-family executives differently. Such “bifurcation bias” is commonly assumed to damage performance, but our study, published in the Journal of Management Studies, shows that this conclusion is too simple. Preferential compensation harms firms mainly when non-family managers view family privilege as illegitimate. In contexts where family-centered treatment is expected and accepted, its negative performance effect can disappear.
Family firms are different by design
A family firm can never be entirely like a non-family firm. Family members often carry ownership responsibilities, long-term commitments, emotional ties, and firm-specific knowledge that professional managers do not share. These differences frequently lead controlling families to treat family and non-family executives differently.
Researchers call this bifurcation bias: the preferential treatment of family members over outsiders. It may appear in recruitment, promotion, monitoring, or compensation. The conventional wisdom is that this bias is a governance failure that family firms should eliminate. Our research suggests a more nuanced conclusion: bifurcation bias does not necessarily hurt family firms.
The real issue is legitimacy, not equality
Non-family managers do not automatically view every difference in pay for family and nonfamily managers as unfair. Their reactions depend on what they believe family and non-family executives are legitimately entitled to receive.
When compensation is expected to reflect competence and contribution, paying family executives more simply because they belong to the owning family can appear unjust. Non-family managers may then reduce their effort and commitment, creating agency costs and weakening firm performance.
But family membership can be regarded as a legitimate basis for different treatment in some settings. Non-family managers may join a strongly family-centered organization with the expectation that family members will receive certain privileges. When the pay difference matches these expectations, it may not provoke negative reactions.
When family favoritism becomes more acceptable
Our study examines whether family firms suffer when family managers receive more favorable cash compensation than comparable non-family managers, and whether the consequences depend on the context in which this occurs. We find that such favoritism can hurt firm performance, but that its effects vary considerably depending on the social values surrounding the firm, the level of competition it faces, and the extent to which family members are involved in management. This is consistent with what we heard from the managers we interviewed. As one non-family manager explained, salary and bonus should reflect the value of one’s work; when family owners favor their relatives, non-family managers may become dissatisfied and less willing to put in the same effort.
First, social values matter. In contexts where family obligations, kinship, and hierarchy are widely accepted, special treatment of family members may be viewed as more understandable. A non-family manager may not necessarily like such treatment, but may see it as part of how a family business operates. In less traditional settings, the same practice is more likely to be seen simply as unfair. Our evidence reflects this difference: favoritism was much more damaging where traditional values were weaker, while its negative effect largely disappeared where such values were stronger.
Second, competition matters. When a firm operates in a highly competitive market, managers are under greater pressure to deliver results, and ability and contribution become especially important. In such an environment, it is harder to accept that someone receives better pay mainly because he or she belongs to the owning family. By contrast, when competitive pressure is lower, such differences may attract less attention and create less resentment. Consistent with this pattern, preferential treatment was considerably more damaging in highly competitive industries.
Third, family involvement in management matters. When many senior managers are family members, everyone can see that the company is strongly family run. Non-family managers who join such a business are therefore more likely to expect that family relationships will influence pay, authority, and opportunities. But when most senior managers are outside professionals, special treatment of the relatively few family managers becomes much more conspicuous. In our study, favoritism was damaging when family involvement in management was low, but this negative relationship largely disappeared when family involvement was high.
Taken together, the message is that family favoritism is not judged in isolation. The same practice can provoke very different reactions depending on what people see as normal, what the competitive environment demands, and what kind of organization they believe they have joined.
What family business leaders should consider
Our findings do not suggest that favoritism is desirable or that family firms should ignore fairness. They show instead that family businesses should not assume that the same compensation practice will produce the same reaction in every setting.
Family owners should consider whether pay differences reflect genuine differences in responsibilities, commitment, or contribution. They should also examine whether the basis for those differences is understood by non-family managers.
Clear communication is especially important. A pay difference that reflects ownership responsibilities, succession commitments, or distinctive firm-specific contributions may be interpreted differently from one that appears to be based solely on family membership.
Family firms should be particularly careful when they are professionalizing their organizations, recruiting outside talent, or operating in intensely competitive industries. In these circumstances, unexplained family privilege can undermine the commitment of the professional managers on whom the firm increasingly depends.
Beyond the family firm
The broader lesson is that employees do not respond only to the size of the rewards. They also respond to the rationale behind the rewards.
Differences in pay and opportunity communicate whose contribution is valued and what characteristics entitle someone to favorable treatment. The consequences of inequality therefore depend not only on what people receive, but also on whether they accept the basis on which rewards are distributed.
For family firms, the central question is not simply whether family members receive preferential treatment. It is whether that treatment is perceived as legitimate by the non-family members whose expertise and commitment are essential to the firm’s future.
The paper
Li, W., Li, X., Chrisman, J. J., & Fang, H. C. (2026). Bifurcation Bias in Executive Compensation and Family Firm Performance: The Role of Normative Context. Journal of Management Studies.
