The Factors involved in Setting Family Salaries in a Family Firm
The pay structure within a family-run business can be very different to that of other private or investor-owned companies. This is due to the fact that there are more dynamic connections at play within a family business.
Deciding how to compensate family members working within the firm can be a tricky path to navigate. Not only do you need to evaluate the individual family members of whom you may have pre-conceived personal opinions, but each member’s pay will relate back to every other family member employee’s pay, as well as be under the scrutiny of family members holding shares.
Common Compensation issues faced in Family Firms
Mixing family with business, personal lives with professional ones, can lead to some problems if business ties are not managed fairly.
Some commonly experienced potentially problematic situations are:
- An inability to detach: When you work with the majority of your family members in one form or another, it’s very difficult to leave work behind at the office. More likely than not, business talk will come up at family events, making it hard to make possibly unpopular decisions in the business.
- Role confusion: It’s difficult to unbiasedly evaluate family members without being influenced by their personal role in relation to you. This is especially true if it is a family member who is senior to you out of work, but not within the business.
- Families are taught to share: A lot of family firms can find themselves in the position where they are overpaying certain family members for their role and abilities in the business, while underpaying others – all in the name of fairness. This is a tough subject to broach with the family, as those benefitting from unrealistic salaries will instantly shut down any discussion on the subject.
- Too many cooks: As a family business grows through successive generations, there are more and more family members who are shareholders, with opinions, but are not directly involved in the running of the business. All these family members still want to be involved in how the business is run, especially when it comes to compensation of those working within the business. For shareholder members, high salaries can be seen as taking away money from the main family “estate” and frowned upon.
Compiling a fair compensation plan for family members
There are a few pointers that are a good idea to follow in order to quell any disagreements about compensation within the family firm.
- First things first, decide on the basis of how compensation will be granted and then stick to it. Whether you decide to pay everyone equally across the board, or investigate and implement market-related salaries, apply the same philosophy to every family member working within the firm.
- Determine the market value for key jobs, in order to keep qualified family members who may otherwise look elsewhere for better opportunities.
- Bring qualitative factors into play by evaluating what extras family members could be bringing to the job that outsiders would not be bringing, such as the family ethos of leadership.
- Decide on what the firm’s incentive structure – establish whether it will be dependent on personal goals being set and met, or will it focus on company goals being achieved.
- Maybe the second most important point, after being firm in the company’s choice of payment structure, is to communicate adequately to every member of the family how compensation will be handled. This will lead to less confusion, or resentment amongst family members.
When evaluating the compensation of family members in a family run firm, many factors come into play, causing it to be less than straight forward. That’s why no matter what course is decided upon, the decision must be firm, and not open to the opinion of family members not directly involved in the firm. Also, since personal relationships are involved, open and honest communication becomes crucial, not only for the benefit of family relations, but also for the continued survival of the business.
- Robert Wilkening, “Why are Compensation Issues in a Family Business Different?”, UMass Amherst. Available at: http://www.umass.edu/fambiz/articles/money_issues/compensation_issues.html
- Kent Lutz, “Common Causes of Family Business Compensation Problems”, Institute for Family Business. Available at: http://www.instituteforfamilybusiness.com/Compensation.html
- Susan C. Hanlon, “Family Business: Compensation: Pay to Play”, IBMag. Available at: http://ibmag.com/Main/Archive/Family_Business_Compensation_Pay_to_Play_10455.aspx