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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