Compensation: How To Fairly Pay Family Members

Working in a family owned business can be wonderful. Laboring alongside those closest to you, doing work you love to increase the prosperity of everyone in the family can make a job a joy rather than a burden. But that rosy vision tends to splinter and collapse when the subject of family employee compensation comes up. Many family businesses experience significant friction over the issue of pay for family members versus non-family members within a business.

In many family enterprises, family members are paid more than they contribute with salary being considered a benefit of being “part of the family”. In others, being part of the family means taking less than industry standard for the same level of work. Frequently, the process of deciding family and/or employee pay is hidden from all but a few decision makers.

When you add the complicating factors of lifelong personal histories, simmering resentments, conflicting personalities, intense emotions, frayed relationships and, occasionally, bitter jealousy, compensation can be the issue that tears a family business apart.

Family compensation also affects non-family employees. They may resent the higher salary given to a family member seen as not pulling his or her weight. The business may find it hard to recruit and retain non-family talent when family members receive more than non-family employees doing the same job.

Therefore a well-defined and clearly communicated compensation strategy is essential to the harmony of the business environment. The family business needs a long-range, sensible strategy for compensating family members. Here are key things to consider when developing this strategy:

  • The compensation strategy is created with input from family employees, non-working family members and key non-family employees.
  • It is based primarily on what’s good for the business.
  • It includes job descriptions laying out the duties, skills and responsibilities of all positions.
  • It prescribes salaries based on market rates for similar positions in similar companies.
  • It calls for regular, systematic performance evaluations including family employees.

A part of the compensation strategy may specifically address how family members will be paid. It should rule out common errors like paying all children equally, or basing compensation on the family employee’s financial needs. The idea, again, is to base compensation on business needs.

The completed strategy should be shared with family members who work in the company and those who don’t. Non-working family members will be reassured that their compensation is not being reduced due to inflated pay to family employees.

Family employees will be reassured that they are earning their keep and, should they wish to work outside the family firm, will be able to command a similar wage because they are worth it, not because of their family ties. Another benefit is that family employees will be motivated to maintain and improve productivity because their earnings depend on it.

Some lesser performers among family members may leave if their pay is cut. But this will enhance the value of the business long-term. A fair compensation strategy and family employment policy will reduce infighting during a succession event and improve profit quality and sale price of the business should it come to that.

Of course, the same factors that make a family employment policy and long-term compensation strategy so important for family firms make it hard for family executives to design and implement. Many family businesses find an objective, informed and experienced outside advisor can help to inform and guide this process. If your family business is contemplating changing how family members are compensated, REGENERATION has trained consultants who can assist you.

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