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Advice
Business Observer Monday, Mar. 29, 2021 9 months ago

A touchy topic: Compensation in family-owned businesses:

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Determining salaries should be a data-based processes — without emotion or favor. 
by: Joe Kager and Dan Steele | Guest columnists

Family businesses cover a wide range of industries and can be small or among the world’s largest companies. These companies face unique challenges that arise from the complex interaction of business and family relationships — and the desire to avoid conflict within the family. Given the broad spectrum of sizes and types of family businesses, it’s difficult to describe a single compensation strategy effective for all of them. But there are some best practices that can foster success.

In our experience, the inability to effectively address compensation in family businesses is mainly due to two factors:

  1. The difficulty of objectively addressing the very personal issue of compensation for business partners who are also family members. Discussing individual compensation is never easy but might be more difficult for family businesses where the partners’ relationships are shaped by their family histories as well as their business roles.
  2. The belief that family members should not be paid an externally competitive amount based on their role in the business because they are family members and receive dividends from the business based on their ownership stakes.

Four tips

  • Involve family stakeholders throughout the engagement. All family members who have a stake in the company should be involved in the process. This helps ensure everyone understands the underlying issues early on, develops trust along the way and has the opportunity to help develop the company’s approach to compensation. We typically engage with individual family members independently at the beginning of the project and gain their understanding and buy-in before engaging with the family collectively.
  • Use market data to anchor the compensation plan. We recommend family members working in the business be paid commensurate to the value of their position in the external market. It’s common practice for family businesses to either overpay employees who are part of the family or undercompensate them for the work they provide. Using valid external compensation data helps ensure everyone understands and trusts the compensation process.
    Courtesy. Dan Steele.

     

  • Introduce pay-for-performance incentives. A well-designed pay-for-performance program aligns pay with the achievement of the business’ operational and financial goals and measures employees objectively. Objective measurement is especially important at family-run businesses because it’s critical that everyone feels like the incentive plan payouts are grounded in fairness and linked to actual performance. A portion of total compensation should be based on the overall results of the business as well as individual results. This ensures the pay system recognizes contributions to the company’s success.
  • Add some formality to the work relationship. Developing plan documents, employment agreements and pay review processes lessens the perception that pay decisions might not be fair. Creating job descriptions also helps to benchmark positions in pay surveys and determine appropriate pay rates for each role.

Achieving collective agreement on a compensation plan for a family business is part compensation consulting and part psychology. Following the tips above can help lead to a positive outcome. Remember: Family relationships are important and don’t need to be put at risk by disagreements regarding pay.

Joe Kager, a managing consultant at The POE Group, a Tampa-based executive compensation firm, has more than 25 years of experience in compensation and human resources. Dan Steele, a compensation consultant at The POE Group, has more than 10 years of experience in compensation and benefits management, with an emphasis on executive compensation, equity compensation plan design and retirement plan design.

 

Click the links below to hear best practices from other families working through business succession and experts who have helped others.

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