Stock option plan practices in family firms: The idiosyncratic private benefits approach

• The study provides explanation on the use of stock option plans in family firms through a new explanatory approach, based on the extraction of remunerative private benefits.
• The study contributes to the literature framework on the compensation of directors in family firms.
• The study provides empirical evidence on the Italian context that has been often neglected by previous research, finding a first confirmation of the explanatory power of the approach, also in relation to the governance features expressing the role of family key figures.
• The study opens up a new research field on the compensation in family firms also in other countries and longitudinally over time.

In this study, we propose an original explanation, which is an alternative to “optimal contracting theory” and “rent extraction theory”, for the use of stock option plans (SOPs) in family firms. This explanation is based on a classification of the private benefits of control, which include “idiosyncratic private benefits”, or the remuneration of certain family-specific resources that key family figures contribute to a firm. These resources have positive effects on future results; however, in the interim, they are not contractible, and their value cannot be assessed as shareholders’ capital. SOPs with long-term horizons, performance orientations and family beneficiaries, which are inadequately explained by the “optimal contracting” and “rent extraction” theories, could instead be explained by an “idiosyncratic private benefits” approach, as demonstrated in this study. A logit regression confirms the likelihood of these SOP increases with a higher involvement of key family figures in the governance of a firm (family CEO, board familiness, family CEO duality, founder family CEO), consistently with the logical premises of the hypotheses.