How Do Family Firms Treat Workers

This post examines how family firms manage and reward employees, highlighting a fundamental tension between relational strengths and organizational inefficiencies. Family firms are often portrayed as more humane workplaces—places where loyalty, long-term relationships, and a sense of belonging shape how employees are treated. But recent research suggests a more nuanced reality, where the “bright side” of family ownership coexists with important drawbacks.

On the positive side, family firms tend to foster stronger emotional ties between owners and employees. This can translate into a more paternalistic approach to management, where workers benefit from job stability and long-term implicit contracts. Employees may experience less confrontational labor relations and greater protection during economic downturns. In fact, this stability often comes at a cost: wages in family firms are typically lower, partly reflecting an implicit trade-off between pay and job security.

However, beneath this stability lies a “dark side” that has gained increasing attention, as recent research has investigated very granular employer-employee matched data drawn from administrative sources. Evidence from Italy, based on such data, shows that employees in family firms not only earn less—even after accounting for productivity and worker quality—but also experience slower and less rewarding career progression. Promotions are fewer, and wage increases tied to advancement are smaller. A “glass ceiling” often emerges, as top managerial roles are reserved for family members.

The issue becomes even more pronounced when looking at talent allocation. Administrative data from Denmark reveal that family firms tend to employ less talented workers on average, particularly in high-skill and managerial roles. Nepotism—favoring relatives over more qualified candidates—appears across all levels of the organization, limiting opportunities for non-family employees and reducing the firm’s ability to attract top talent.

These dynamics have important implications for productivity. A large body of research shows that matching the right people to the right jobs is crucial for firm performance. When promotions and hiring decisions are not merit-based, firms risk misallocating talent, discouraging investment in skills, and ultimately reducing productivity. Cross-country evidence even suggests that economies with a higher prevalence of family-controlled firms tend to exhibit lower levels of meritocracy.

In short, while family firms may offer stability and foster loyalty, they can also struggle with meritocracy and talent management. The challenge for these firms—and for policymakers—is to preserve their long-term orientation and relational strengths while addressing governance issues that hinder performance and growth.

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Marco Pagano is Professor of Finance at the University of Naples Federico II and a Research Fellow of the Centre for Studies in Economics and Finance (CSEF), of the Einaudi Institute for Economics and Finance (EIEF) of the centre of Economic Policy Resaerch (CEPR), and an ECGI Fellow and Research Member.

This blog is based on a discussion held at the 2026 IESE-ECGI Corporate Governance Conference Family Firms: Purpose, Economic Performance and Social Impact. Visit the event page to explore more conference-related blogs.

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