Soriano: A Fair Compensation Plan for Working Family Members

Many family businesses face a slew of complex business decisions as they transition to the next generation. Without an internal, structured plan, complexity and confusion can overwhelm the family and the business. In today’s article, we focus on family executive compensation, an extremely sensitive and insightful topic. Call it a huge elephant in the room, but it’s an area that can swing both ways… helping to positively trigger management team development and encourage generational transition, or serve as a stumbling block to the continued growth of the company.

Peter Leach, a former partner at Deloitte in the UK, said: “In the family system, the guiding standards are that family wealth should be distributed either according to need or according to principles which are fairly transparent. In the case of siblings, for example, equity generally means that resources are distributed fairly. But in business, compensation should be based on the individual’s contribution.

What is the right compensation system?

In my family counseling work, this compensation issue is exacerbated by the founders’ misguided notion of fairness and equality. Instinctively, the owner/parents would choose to follow the family system where the acceptable norms are that family wealth should be distributed either according to need or according to equitable principles. By pursuing a flawed family (family first instead of business first) system of kin compensation, the business leader has launched a culture of entitlement. This is a serious mistake that can create all kinds of tension and stress that will manifest in this unstable environment. This founding mindset of family first must end and it is important to break this paradigm, both to manage children’s expectations and to attract non-family talent.

How can founders and business leaders solve this looming risk management problem? What can the family business enact or initiate to diffuse possible jealousies between brothers and sisters or between cousins? How can a parent/owner openly discuss a fair and rational (not equal) compensation system for their children without alienating others? How can the family business incentivize high performers and punish low performers? How should the patriarch treat family members who do not work in the business? What does profit sharing mean? Is it similar to splitting dividends? How can the family institutionalize and structure a pay system for children in a way that is not seen as nepotism or favouritism? Should he be the founder leading this compensation planning initiative? Should it include everyone in the family? Should the HR manager be part of this plan? Should it be confidential, and is HR qualified in the first place? How does a market-based compensation system work? Is there still time to change the current salary structure when the children are already in their thirties or forties and are married? What will the adult members of the next generation think of the change? What about the children with the most offspring? Should their pay be higher since they have more household bills to pay?

Stop procrastinating, start the process now!

When faced with such questions, where and how do you find the answers? Can the answers be found among local business clubs or chambers or do they have to seek help from other business owners? How can it be implemented? The parents/owners have long felt a growing resentment among the children, but they still struggle to put the right plan in place.

To ensure that salaries are split equally between family and non-family employees, business leaders must match them with industry guidelines for each job description. When additional compensation is needed to reward family members for their contributions to the business, other benefits like variable compensation may come into play. For some families who are driven by company best practices, stock option plans and share distributions are being considered.

To be continued…

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