By Danielle Walsh

The concept of what is considered fair and what is equal is most certainly prevalent for business owners, managers, and team members. Namely, are bonuses distributed to family employees equally, or are they based on merit, role/responsibilities, and performance?

For family businesses, this concept can be very difficult to navigate, as personal and professional discrepancies often merge to create additional conflict—sometimes underneath the Christmas tree! Indeed, a perceived difference in ‘gifts’ to siblings or grandchildren can seep into the business and impact communication, decision-making, and the relationships of active family members.

At home, the notions of ‘fair’ and ‘equal’ are often perceived as one and the same, and likely does not pose much of an issue. Within a business, however, the same cannot be said. Let us examine some situations where fair is not equal, and the impact that can arise from disregarding this fact.

Is equal pay fair?

Compensation is a known contentious issue amongst most business partners, but even more so in a family business. Often, decisions made by parental owners can impact the personal and professional relationships of the next generation.

In my years as a family business advisor, I have met many business owners who pay family member employees equal salaries, despite significant differences in individual roles and responsibilities. In one instance, a client had installed one of their children as the president, managing store operations, while the other worked part-time, answering phones and helping with customer service. Any time the two siblings were alone, conversation would inevitably turn into a heated discussion about their pay and its unfairness. Every conversation somehow circled back to this discrepancy in effort and performance.

While neither of these next-generation family members said anything to the owners (i.e. Mom and Dad), the subject was creating issues amongst them and with their other siblings. This, ultimately, created an atmosphere and culture of entitlement, which led to decreased retention of non-family managers. Given the labour market, business owners cannot afford to alienate one of their most valuable resources.

Keep it real

Generally, parents aim to treat their children fairly, and, for many, this means treating them equally. In a family business, however, the best way to achieve fairness is to compensate family members based on their roles and responsibilities. This approach helps ensures all members receive what they deserve, while also allowing the business to continue to grow and remain sustainable.

In the example outlined above, the sibling who is the president should be paid significantly more than the sibling who works part-time answering phones. While this may seem obvious from the outside looking in, compensating family members equally (rather than fairly) is a common practice within many family businesses. Shifting to paying family members fair market value for their position (i.e. awarding the same compensation a non-family member would receive to do the job) can result in less resentment and conflict in the short- and long-term, while also supporting a culture of stewardship (as opposed to entitlement).

While compensation is certainly an area many businesses struggle with when it comes to the concept of fair versus equal, ownership can present even greater challenges, which can have a lasting impact on personal and professional relationships.

Equal ownership is often not fair

Consider this scenario:

A family business owner has three daughters. Of these sisters, only one (Sarah) works in the business. Upon his retirement, Dad transfers ownership equally to all three of his daughters. Sarah, who is the youngest, has been managing the business’s daily operations for the past five years. The business is successful under her leadership and annual dividends continue to be paid to all three shareholders. As time passes, dividends create conflict. The two non-active sisters make it clear to Sarah they are counting on their annual dividends, and they expect an increase in this payment, given the performance of the store. They remind Sarah that, together, they hold two thirds of the votes (meaning, they can outvote her). Sarah has no choice but to concede and continuously alter her plans for investing into the future growth of the business. She starts to resent her sisters as the business begins to decline. Then, Sarah hears a rumour her sisters are considering removing her from her leadership role, as they feel she does not share their vision for how the business should be run, yet Sarah is the only one with knowledge of the business, along with the experience and qualifications needed to run it.

In the above scenario, the parents (i.e. the former owners) had no idea choosing to split the shares equally among their three children could lead to so much family conflict. Unfortunately, the two sisters decided they wanted to sell the business to maximize their personal wealth, marking the end of the family legacy and, more significantly, the end of any family harmony.

Sarah’s parents were trying to treat their children equally, but their decision, instead, created unreconcilable differences because it was not fair. Sarah, while compensated for her job, is the one who was working hard, making decisions, and taking the risks related to increasing the value of the business. Additionally, with this shared ownership, if she needed to go to the bank to apply for a loan, her sisters (as co-owners) would also need to sign the loan documentation. Often, siblings who are not involved are not comfortable making choices such as these, thereby hindering the businesses’ ability to grow. In this case, equal was, evidently, not fair.

What could have been…

Family businesses that develop formal family business rules do so to establish clear expectations and terms and conditions with respect to several succession issues, including ownership.

Some family business rules stipulate that, in order to own shares in the family business, one must have a certain degree of education and must be working full-time in the business. The rules may also stipulate how many years of full-time work are required for a family employee to be promoted into management (e.g. five years minimum) and receive ownership (e.g. 10 years, with the understanding the last five have been in management). These rules may also incorporate a test of ‘compatibility’ to ensure the family members get along and have proven they can work together.

Keeping ownership in the hands of active family members has proven to be a highly successful succession strategy. To ensure no child is privileged over another based on their life decisions (i.e. working in the family business or not), successors who meet the ownership criteria would purchase the company at fair market value, paying the owners over time from the profits generated from the business. Purchasing the family business at fair market value makes this process fair, even if ownership is not divided equally amongst all siblings or cousins.

Had Sarah been given the opportunity to purchase 100 per cent of the business (as opposed to inheriting one-third, along with her sisters), it is likely the shop would still be in the family today. In this scenario, it would not preclude her sisters’ children from, one day, working, managing, or owning the business as its third-generation owners if they so choose. The money paid to the parents from the purchase of the business would form part of their estate when they pass away, and could then be provided equally to all three siblings (or as the parents see fit).

When equal can be fair

Ownership is an area where the concepts of ‘fair’ and ‘equal’ often compete—but this does not always have to be the case. Most of my clients endorse the concept of, if family members meet the criteria to make it into ownership, they will own equally. This is fair, given all family members have met the same outlined criteria. In the above example, if Sarah was 100 per cent owner and then one of her sisters decided to change career paths, spent several years in the business, and met the ownership criteria, the ownership would be split 50/50, with the newly joining sister paying Sarah fair market value for the business’s increase in value since her purchase of it.

The concept of fair versus equal has the potential to create lasting conflict amongst family members—conflict which could significantly impair a business’s viability and success. For the business, fair is the preferred model to minimize resentment and conflict, as well as improve the likelihood of long-term business success. Additionally, compensating family members based on merit and only providing ownership to committed, passionate, and knowledgeable managers will give the business a higher likelihood of succeeding for generations, and the family a higher likelihood of wanting to get together over the holidays for years to come. It should be noted, however, that equal is often the model of choice when it comes to personal wealth distribution.

Indeed, there is a place for both fair and equal; the hard part is determining where each is best suited.

Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father published a book titled A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached at danielle@walshfbas.com.