Monthly Archives: July 2015

Compensating family members the right way (part 2)

COMPENSATING family members is a perennial source of emotion and, if left unresolved, poses a future conflict amongst siblings and cousins.

Family businesses are constantly trying to balance the bottom line with paying its family members fairly. That balancing act can become more difficult if a compensation strategy is not clearly defined. Family harmony adds additional emotions to the already passionate topic of compensation.

According to an article published by Findley Davies, a human resource consulting firm, as family businesses grow, so too does the compensation and rewards structure to engage your most valued assets–your people.

In the start-up stage, there are few employees, very little structure, and most, if not all, team members are part of the family. As the company grows, the need for business structure and processes surfaces. In this stage, young family members start occupying positions. This is where the start of the conflict happens.

Some common examples that tend to compromise and disrupt the organization are the following:

  1. Equal compensation for all family members regardless of qualifications
  2. Overlapping and undefined roles and responsibilities
  3. Family members overstepping on their functions and encroaching on other roles assigned to non-family members
  4. Newly-hired family members don’t know how and when to start as reporting structure to a superior are unclear as well.

The key is to work on a compensation plan.

In my article last week, I highlighted the need to prepare an accurate job description for every family member entering the family business. Today I will continue with the following plan of action:

    1. ​​Identify what your compensation philosophy is. Industry standards (market-based) or merit- based? Are you into fixed compensation or do you want to inject a variable compensation? Would you want a combination of a fixed or a variable so you can incentivize performing family members?
    2. Gather information on the salaries of similar positions in your industry. Size up companies that are similar to yours in number of employees, revenue, product, geographic location, etc. What salaries and other benefits do these similar organizations pay their employees, especially the management team?
    3. Fairly compensate and differentiate pay among family members. What is the appropriate compensation balance for hard-working and strong performing family members working side-by-side with less motivated and less competent family members?
    4. Defining a compensation plan based on the qualifications of family members joining the business. Not all family members have the same DNA in terms of work attitude and passion for the job, so a compensation plan that focuses on experience and educational background is important. Base salaries are based on job duties and set at market value.
    5. Develop a succession plan. How will a successor to the leadership be identified among family members/siblings? How will they be prepared for leadership? How will this choice affect the morale of the family/business? How will this successor be compensated?
    6. Design an affordable plan. Obviously, you want to do the best you can with the money you have. What can you afford to compensate each family sibling relative to their individual contribution?
    7. Family members participate in the same compensation plans as non-family employees (an exception is often made where family members who own stock may not participate in a long-term incentive program for non-owner key employees);
    8. The owners are committed to honest, open and constructive communication with employees on performance expectations and feedback as a basis for pay decisions.

Avoid secrecy
Give more focus to compensation during the family exchanges and formal meetings with your HR manager. In an article written by Levitt, he articulates, “Rather than hoping that secrecy can be maintained, a better approach is to talk openly with employees, family members, family member spouses, and shareholders about the company’s approach to compensation: the business purpose of compensation; how compensation is determined; and how different jobs have different levels of value to the company (and thus are compensated differently). This is also the time to clarify for family members and shareholders that they are all responsible for their own financial well-being – and should not expect the business to be their “parent” and “help them out” when needed. Parents can, of course, help their children out, and shareholders can be rewarded for their ownership – but these roles should be clearly differentiated from compensation.”

Family businesses that fail to thoughtfully plan will ultimately lose the battle. Studies show that fewer than five percent of family companies survive past the third generation. This offers an opportunity for family business to develop a compensation strategy that provides clear guidelines on paying its employees (family and non family), resulting in a much greater chance of survival.

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Compensating family members the right way

THE past two months, I have been inundated with emails from readers requesting (some actually “pleading”) for an article on the subject related to compensation.

I deliberately ignored these requests, as I have my own topic calendar until I figured in three (out of seven) family interventions this month and took me aback, as all issues zeroed in on compensation!

So on my flight back to Manila, I decided to informally poll the email requests and expectedly, 70 percent of the emails came from the Gen 2 and Gen 3 family members. This made me decide to write this article pronto. Thank you my dear readers for the “push”.

Gen 2 and Gen 3 concerns

We typically refer to these two generations as the sibling and cousin generation phase. This a a phase in the development cycle of a family business where family members have extended members in spouses, in-laws and cousins, nieces and nephews.

I consider this phase a very complex one and often referred to as the multi-generational stage. When not guided appropriately, it can result in unnecessary conflict.

Is money the root?

They say, “money is the root of all problems”, but this can be prevented if individuals are clear with what is fair and just. This is true in family businesses.

Families involved in business tend to avoid talking about money matters. It is a very sensitive topic and creates so much discomfort to all parties. However, “sweeping this issue under the rug” only adds up to the confusion and dissatisfaction.

I often receive requests for guidance involving sibling and cousin rivalry conflicts. An important thing to remember is that sibling rivalry is a normal aspect of childhood and is simply about competition for parental attention and approval. But when sibling rivalry persists into adulthood, the conflict and self-doubts can be devastating.

Preparing a fair compensation plan

Compensating family members, particularly your own children, is a sticky business. Not all people are really created equal, even though they come from the same bloodline. It is also quite difficult to assess and compare the talents of siblings who are also employees. As a result of the stress that this causes, many family business owners ignore the problem. Thus, the issue of compensation becomes a breeding ground for dissension in the family.

The topic of compensation plans in the family business has found its way into many books, articles and speeches on the subject. For the purpose of this principle I will just note that any compensation plan needs to be well communicated and, of course, as such, should be written and distributed to those covered by the plan. It should contain enterprise goals and goals for individuals, particularly for the possible successors.

There are a number of family businesses that have compensation systems which simply evolved over time or were developed or imposed by previous generations of family members in control. Such systems may be the current cause of irritation, anger or even open hostility. It is very difficult for the family members embroiled in a sticky situation to, by themselves, develop a solution. In most situations, it is better to select a competent professional for proper advice.

Although it is not easy to put aside the anxiety caused by developing a fair compensation plan for your family members, especially children, it is absolutely necessary if business is to thrive.

Fair is equal, equal is definitely not fair

Compensation for members of a family of the same generation is where most problems occur. The usual systems are equal pay for members of the same generation or compensation based upon the fair market value for the position. These are the extremes and there can be variations in the middle. The equal pay system usually arises as a second generation comes into the family business. Dad and/or mom are used to treating children equally, so it seems natural and “right” to pay all the children the same, regardless of their position or their educational and other business experience. “Equal and right” may seem appropriate to dad and/or mom but the children and, unfortunately, their spouses over time may not see it that way.

A kind of creeping irritation can occur and without being addressed, can destroy all the good things about working in a family business. This usually happens after dad and/or mom are no longer in control of the business.

So if you follow the advice of experts, you will design your compensation plan according to these steps:

1. Prepare an accurate job description for each child or sibling. Include responsibilities, level of authority, technical skills, level of experience and education required for each job.

To be continued.

Creating a family employment policy: a must! (part 2)

ACCORDING to an article published by the KBH Group, a full-service chartered accounting firm based in Canada, the best way to manage these expectations—and the ensuing family drama—is to create thoughtfully-written family employment policies. Having these policies in place lets all of the relatives know exactly how the company handles the employment of family members.

In my last column, I explained the first pre-employment condition and highlighted an important rule: the requirements for being accepted into a job post at entry level.

Are the expectations of family members clear, as far as attainment of certain degrees or certifications before they join the company? If so, this should be spelled out in the employment policies, along with a timeframe required for completing the education or training. How about investment of the family business on training for special or technical skills?

At the Ateneo Center for Continuing Education (CCE), short and diploma courses on practically everything about business are offered all year round and I must admit, part of my mentoring model is to encourage family members to enroll and further reinforce their business and management skills. So far, it’s worth every peso invested by family businesses!

In today’s column I will complete the governance aspect related to family employment policies, namely:

Shared vision and mission, participatory leadership and values for teamwork

A family business is strong when all who participate in its development shares a common vision and mission. In the succeeding generations, shared objectives and course of action should be kept in line. Even if changes are needed in the business in terms of direction and management, what is important is that everyone agrees for the better, especially the siblings. Participatory leadership allows the siblings to demonstrate their leadership potentials in specific areas from which each of them is assigned. This way, team effort is centralized in the realization of common goals.

Chain of command and reporting structure

The chain of command from top to bottom must be well-structured and recognized at all circumstances so that proper instructions and orders are communicated clearly. Siblings should comply with this, even if they need to receive orders from a non-family member who happens to be the manager. Surprisingly, a non-family member could be a better option compared to a sibling as someone to receive orders from or report to. Reporting to a brother or a sister may result in over-familiarity, leaving the report unaccomplished or unattended, thinking that the sibling would not reprimand or pose sanctions.

Remuneration and benefits

The remuneration and benefits have to be reasonably provided, making sure that it is adequate (covers basic remuneration rates) and market-related. Doing business for the sake of the family’s gains is good, but it is not an upright decision when work pay for siblings is too high. It will result to budget constraints in the family business. Underpayment, likewise, is detrimental, because it shows lack of fairness and loses the siblings’ right to receive adequate remuneration despite business entitlements.

Performance evaluation

The siblings should not be excluded and given special treatment at performance evaluations. All personnel should be evaluated objectively so that in the process, the quality of service is monitored and further developed; and the productivity of the family business is identified.

Recognitions and rewards

Careful attention must be made on determining who among the siblings has become outstandingly productive and who among the siblings has shown professional participation and significant contributions. Rewards could be a little tricky to determine but like remuneration, it has to be reasonably set. Rewards and recognitions are external motivations, but what is more important in this is that it fosters appreciation where credit is due, which gives more strength for the siblings to work and accomplish excellent results for the business.

Termination and/or retirement

A clear timeline will aid the siblings about when to prepare to take over the family business. Also, when the siblings have taken over, they will be guided in the future through the timeline in knowing when they will have to be terminated (when malpractice is done) or be retired (when their term is finished).

There are other indispensable elements where governance policies can further focus on. Some of these clarify issues related to training, experience, communication and code of conduct. In the end it all boils down to the primary objective of institutionalizing these policies so discretion and conflict of interest is mitigated.

Finally, compliance and consistent application is one major step in harmonizing relationships and at the same time address sustainable growth amidst a complex business environment.

Creating a family employment policy: a must!

IN the Philippines and in Asia, I rarely come across family members working in family businesses having employment contracts. Their entry in business is usually guaranteed by their last names, a sort of a birthright.

For most family businesses, requiring family members to sign formal employment contracts may be a waste of time, especially for businesses in the startup phase.

However, as the business transitions from a mom and pop, single proprietorship type of business to an organization in the multi-generational phase where siblings, cousins and in-laws are involved, then it is hugely important for family members to have clear and concise employment contracts.

Without rules on how family members will work together in the family business and with different views of what the family business should be about and what should take place, conflict is almost inevitable!

Family businesses need rules by which to operate – and if they don’t have them, they will fail.

What are rules? Rules are authoritative statements of what to do or not to do in a specific situation, issued by an appropriate person or body. It clarifies, demarcates, or interprets a law or policy.

What are rules for, anyway? Rules replace thought. If you know the rules, you always know what to do. Discretion among family members can almost always cause disagreements. If you know the rules, you never have to stretch too far. As Douglas Bader, the aviation hero said: “Rules are for the guidance of wise men and the obedience of fools.”

Tipping point

According to an article published by the KBH Group, a full-service chartered accounting firm based in Canada, there comes a time in every company—a tipping point—when growth prompts the need for more formal policies and procedures. One of the areas where this need quickly becomes most obvious is in the human resources arena. As the number of family members increases from generation to generation, the complexity of hiring, training and managing relatives can quickly overwhelm the original founders.

It further elaborates that part of the problem is that sometimes, typically after the second generation of family members is hired, there’s an expectation that all of the third generation of children and cousins will find life-long careers in the family business. While this works beautifully for a few family companies, it’s untenable for most.

We can naturally anticipate that some family members are more talented and hard working than others while some possessed unique skills that make them indispensable to the company. On the other hand, we can also expect that others are less motivated, or just aren’t interested in pursuing a career there.

Family employment policies must be intentional

To perform financially and grow, the family business must initiate an institutional approach in dealing with the entry of family members. This type of governance, written by the family members themselves to articulate the rules that govern the way the business is managed, is often referred to as a family employment or participation agreement.

A participation agreement entitles siblings to comply with certain rules in the family business to establish equal opportunities, maintain unity and direction, value respect and foster communication. The agreement provides what is due and lawful, monitor and evaluate the quality of performance, recognize and reward who is creditable, and ensure proper exit strategies. It also contains the rules on how the family business is to be managed and directed.

I have listed 10 essential components typically found in a family employment agreement:

Requirements for being accepted into a job post at entry level

To prevent loss of motivation among employees due to a situation wherein the top positions are deemed reserved only for the owner’s children, specific job requirements must be firmly solicited among the siblings. Whatever the position is, educational attainment and significant experience from another company are two basic requirements that give backbone for the siblings to be acknowledged as qualified for a position. The family business is also advised to accept participations/applications only when a position/s is/are open. If not, then accepting the siblings would cause budgetary and management issues that would be detrimental to the business.

To be continued…

(sorianoasia@gmail.com)

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(I will be in Cebu on July 25 to deliver a talk entitled “Creating Growth Opportunities for Family-Owned Enterprises”. The venue will be at the Choi City Seafood Restaurant at the Banilad Town Centre. This timely one-day franchise and marketing seminar is organized by the Octopus Strategic Branding Group. Those interested to attend, please call Mr. Danny Wong at 0917-8900063.)