Bifurcation Bias in Executive Compensation and Family Firm Performance: The Role of Normative Context

Abstract Bifurcation bias, the preferential treatment in favour of family managers over non‐family managers, is prevalent in family firms, yet research on its performance implications remains inconclusive. We argue that this inconclusiveness reflects insufficient attention to the normative contexts that shape how non‐family managers interpret differential treatment. Drawing on justice and entitlement theories, we argue that non‐family managers' fairness judgments hinge on whether family membership is perceived as a legitimate basis for entitlement. Using longitudinal data on publicly listed Chinese family firms, we find that bifurcation bias in cash‐based compensation undermines performance, but that this relationship is contingent on normative context. Specifically, the negative effect is attenuated in regions with stronger traditional values and in firms with greater family involvement in management, whereas it is amplified in highly competitive industries. By demonstrating that entitlement judgments are socially embedded, this study offers a contingency‐based resolution to the debate over whether bifurcation bias harms family firm performance and provides practical guidance for family firms seeking to balance fairness with family‐centred goals.