Soriano: A fair compensation plan for working family members (Last part)
IN Asia, family businesses remain the most dominant organization in all emerging and developed economies except China. For visionaries and business owners, building a start-up business is a lot like having a child. You start with a simple idea and work to bring it to life, then dedicate a lifetime to nurturing your creation and helping it grow and flourish. And when the time comes to pass the baton, succession and leadership take root with the arrival of committed, passionate and skilled next-generation family members. What I have described is the ideal life cycle of a family business focused on stewardship and legacy. Unfortunately, this “ideal life cycle” represents a measly 5% in our current portfolio of family clients in Asia. The rest are in trouble.
Too often, parents/founders find themselves in a difficult position, trying to balance growth with efforts to create the right environment where the children receive the right compensation. This is where many leaders are at an impasse. And this is where the complications lie!
As the business moves into the next generation (multi-family) phase, more problems are amplified! The company suddenly encounters different stakeholders with varying needs and expectations. These stakeholders (family members) can be active (working in the business) and passive. Some have families and others are just getting started. Regarding how the company remunerates these stakeholders, older members expect better returns on their investments so that they can participate in a good dividend policy, others prefer incentives and sharing of benefits, while some may simply want more compensation. Family circumstances (marital status, number of children, lifestyle and influence of in-laws) can add to this complication and growing differences in how the business evolves.
This is what distinguishes a “family business” from an ordinary business enterprise. When the salary structure of family members remains unclear, undefined, and poorly explained, the emotional element can manifest as jealousy, rivalry, and conflict. How should leaders pursue the right compensation plan? I’m sharing a list of “must-do’s” to get the family started on the path to adopting best compensation practices.
a. Why do we need to create a compensation structure? What are the objectives ? Which model should we use? Is it industry and market driven? Will it be a combination of fixed and variable compensation? When should the new structure be initiated? How can this be passed on to children? Should this proposed plan include non-family executives?
b. When the family begins to work on their family constitution, it is strongly recommended that the proposed plan be initiated and given to the family council. Developing the plan is a top priority and needs to be addressed urgently
vs. To family businesses with existing family agreements, we encourage the activation of the family council and the establishment of an ad hoc committee to plan remuneration mechanisms with the help of an experienced advisor
D. For those who do not have family arrangements in place but with an active board, we encourage the inclusion of the family compensation plan on the agenda for the next board meeting. In order to make the plan impartial, I encourage Board members to set up a compensation committee composed of independent directors and an advisor so that they can objectively recommend the right structure.
e. For many traditional families with no work council and no family constitution, the best option is to hire a consultant who can help develop a pay-for-performance model and back it up with data pulled from industry insights.
F. For family businesses employing multi-generational families, we typically assign and appoint a dedicated family member and senior non-family manager to oversee implementation.
Finally, for those business leaders who have no intention of embracing change and institutionalizing pay-for-performance among members of the next generation, you will need much prayer and divine intervention to navigate the perilous journey of succession.