Compensation in family businesses
In my experience working with family businesses, this clarity is frequently lacking. I have often seen family members get paid equal wages despite having differing roles and responsibilities. One can only imagine the resentment that grows amongst siblings or cousins when they are all paid the same despite some of them playing senior management and leadership roles while others play junior or administrative roles.
I have also seen some family businesses pay their active family members based on need. For example, the sibling who had four kids but lesser responsibilities was paid more than the sibling with one kid who was CEO. These situations create a difficult dynamic and potential issues amongst siblings and cousins, which will only continue to grow over time if not managed. This makes it increasingly difficult for siblings and/or cousins to work, manage, lead, and own together.
With the pirates, crew members were compensated according to their positions onboard. It makes sense the captain is paid more than the crew, as are the gunner, boatswain, and others in positions of importance. Family businesses would greatly benefit by doing the same. However, it’s never easy to tell your son, daughter, niece, or nephew who just came out of university and wants a job in the family business they are not worth the $80,000 they were hoping for.
When there are no policies in place for compensation of family members, the individuals receiving less than they are worth will often assume it’s due to personal issues (i.e. mom, dad, aunt, or uncle never liked me much or preferred another), while those receiving more than they are worth will assume it’s due to their self-assessed skill set or simply based on entitlement.
Family business rule: Compensation
If all family members were made aware there are family business rules, one of which deals with compensation, related conflict would be minimized or, better yet, eliminated. The compensation decision would no longer be a personal one, but an objective one based on predetermined rules. Further, there would no longer be any surprises with respect to what family members can expect, given it is already outlined.
The rule for compensation could include the following clauses:
- family members will be paid based on fair market value (FMV), meaning the same rate of pay that would be paid to a nonfamily member to do the same job;
- as with other employees, pay increases will be based on performance (other than the annual inflationary increase);
- a compensation review will be carried out every three to five years to re-evaluate FMV; and
- for executives, the compensation package will include a base salary and pay for a performance component based on a predetermined formula (e.g. percentage of net income or divisional income) as well as corporate benefits, with the distribution of corporate profits also clearly outlined based on participation by executives.
What constitutes reasonable business expenses should be outlined in a policy especially for active family members. If this is not outlined in writing, the abuse of corporate assets can be a major detriment to family relations in the business. Pay arrangements for active family members’ leaves of absence and sabbaticals should also be outlined in writing so it is clear to all how these situations are to be handled, rather than dealing with them on an ad hoc basis.
This means when a family member joins the business, he or she will have a clear understanding of the salary or compensation package that can be expected. It also means those with more responsibilities and pressure will receive compensation commensurate to that position. However, compensation is not the only issue. Corporate benefits tend to create as much conflict amongst families in business as compensation does, if not more.
