Nepotism is considered a conflict of interest because the relative may not be the best person for the job.
Self-dealing is a situation in which someone in a position of responsibility in an organization has outside conflicting interests and acts in their own interest rather than the interest of the organization.
Employees or outsiders who think they were a "victim" of a conflict of interest can bring lawsuits against your company.
Set up policies and procedures for all possible types of conflicts, from board policies on down.
In certain circumstances, conflict of interest can result in prosecution.
For example, public officials, like state legislators, are specifically prohibited from activities that would result in a personal gain because of conflict of interest. In most cases in private business situations, conflict of interest matters are handled in court by a civil lawsuit.
A common conflict occurs when a board member hears of a potential deal that might affect the selling price of company stock (up or down).
The board member's attempt to profit from this knowledge is called insider trading; it's illegal as well as being a conflict of interest.
If the executive isn't in a position to give favors, there's not a conflict of interest.
The relative might justly deserve the higher salary, but it's hard to tell from the outside. Federal and state laws have been set up to criminalize conflicts of interest in the public sector (government entities).