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.

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