Compensation: Get Frank
Avoiding Dysfunction in Compensating Family Members Demands Frank Treatment
January 2010 By Powell SlaughterMoney is one of those touchy issues people don't leave at work. Tough
customers or canceled orders don't have to be topics at the family dining table, but an argument about a child's credit card use sure can.
Take a potential hot button such as monetary compensation, bring it to your store's environment, mix in family dynamics, which even in the happiest homes can make for delicate moments, and the question of pay is a potential source of serious disagreement in a family business.
One consultant who spends a lot of time working with family businesses says the only way to keep all parties satisfied when it comes to compensating relatives is to have very frank discussions about job definition and performance expectations.
"These discussions are uncomfortable—I had one client where the mother was angry at me for even bringing up these issues," said Wayne Rivers, president and co-founder of the Family Business Institute, Raleigh, N.C. "She was angry with her daughters about stuff from 20 years back, and mad at Dad for not figuring the situation out on his own like he always did. She basically removed herself from the discussion, and it took a few days for her to settle down. It was touch and go for a while."
SIMPLE IT AIN'T Family Business Institute is a consulting firm specializing in management, processes and business practices for family-owned companies. Rivers believes a lot of such businesses take a seemingly simple approach to compensating family members.
"Too much of the time, you'll see Mom and Dad get paid whatever they do, and then pay all the kids the same," he said. "In family businesses, money equals love."
He cited the example of a recent client as an illustration of how a one-size-fits-all approach to pay isn't as simple as it seems. One daughter had worked at the company for 10 years, doing a good job. Another came in from success in another career, and demanded more than her sister who'd been there all along.
"They ended up giving a raise to the daughter who'd been there and paying them both the same $100,000," Rivers said. "What did you get? Problems. The daughter who'd been there said she appreciated the raise, but wanted to know why should the one who hadn't put in the time get the same amount of money.
Consultant Specializing in Family Businesses Offers Advice on Distribution of Wealth
Fair distribution of wealth from a family business, family employees at different pay levels, and keeping control of the business among those responsible for the company’s performance can be tricky issues.Wayne Rivers, president and co-founder of the Family Business Institute, a Raleigh, N.C.-based consulting firm, addresses those question, and others related to family business, on FBI’s Web site, familyconsultinginstitute.com.“Like most important issues in life, there is no one-size-fits-all solution,” he said. “Each situation must be treated differently ...”Key considerations applicable to just about any family business include:• Differing levels of commitment and involvement in the business.• The percentage of family wealth tied up in the business.• The amount of wealth accumulation needed by the senior generation to assure their long-term standard of living.• Proper timing of turning over operating control to the children.• Proper timing for gifting or wealth distribution initiatives.• The financial strength of the company and its ability to support various levels of salaries or distributions.“The key to success of a good program for fair distribution of business wealth is to put the company first,” he said. “After all, the goose must live in order to lay golden eggs. It’s vital to get the most capable talent in charge even if you have to go outside the family for a time. The capital and future operating needs must be met before bonuses and distributions are made.”Next, there must be an understanding to distinguish between management compensation and ownership compensation.“Salaries and bonuses are rewards for individual work and performance,” Rivers said. “Distributions (whether director’s fees or dividends) are a return for ownership in the company. Distributions are often, in fact, gifts. As such, distributions usually should be equitable just as parents were equitable when filling their children’s Christmas stockings.”He suggests that elements of a well-thought out plan include:• The total amount of money available for salary, bonuses, and distribution is determined by the success of the company on an annual basis.• Set a floor for adding to retained earnings.• Salaries are set at industry norms for the positions and contribution levels of different employees. • Bonuses are based on a percentage of profits over the floor for retained earnings or some other more specific determinant. • Distributions are a separate issue from salaries and bonuses and might range anywhere from 50 percent to 100 percent of net profit above the level for building retained earnings.“Poorly designed and misunderstood salary, bonus, and distribution systems are a major cause of jealousy, hurt feelings, severed sibling relationships, and lawsuits in family business systems,” Rivers said. “Often this is because the compensation program has been designed with tax avoidance as the primary or only goal. The ideal compensation system is one that is fair, well understood, and promotes teamwork and harmony in the business family.”
