Compensation for family members who enter the business should be based on several important guiding principles.
The Family Business Series by David Lively
For years, Gordy looked forward to having his son and daughter join him in his retail furniture business. Gordy and his wife, Alica, had rebuilt the business after Gordy’s father lost the family fortune due to poor planning and marketplace miscalculations. Even though the business went under when Gordy was in college, he could see the potential. He had a degree in marketing and knew the retail furniture business from the inside out. With Alica’s accounting background, they systematically restored the business to health. About the time that Gordy’s and Alica’s two children were off to college, the business was in expansion mode and Gordy was counting on his son and daughter to help take the company into the twenty-first century.
Gordy and Alica laid the groundwork well for inviting their children into the family business. The kids had seen how hard their parents worked. Gordy and Alica involved the children in the business from the start. As toddlers, they played in the office. As teens, they helped out with odd jobs and cleaning. They knew all of the employees, and it felt like one big extended family to them. In high school, the children tried their hands working in the office, on the delivery trucks and on the sales floor.
If this story sounds familiar, perhaps the all-too-common ending will also ring a bell: Loving parents or grandparents mistakenly forever see the young generation as children. They begin to apply the rules of family to the game of business. The slope becomes slippery.
Family business owners often struggle with fair compensation for their children who work for them. Either they pay the children too much, or they pay them below market rates. Either extreme is incorrect and can provoke conflict while undermining the child’s self worth.
Overcompensating children in the business can lead to an exaggerated sense of self worth and encourage family business children to lose touch with the economic value of a dollar and reality in general.
Especially if their job responsibilities are not proportionate with their high compensation, the children can suffer from a devastating loss of confidence and a feeling that Mommy and Daddy provide their life support.
The result is weaklings who aren’t capable of driving the business forward.
Under compensation is just as damaging. Many family business owners purposely under-compensate their children to teach them the value of hard work, crying, “This is how I did it.” Many current leaders think to themselves, “One day the business will belong to the kids and they must be thrifty to make ends meet.”
Or, “The kid’s chance at affluence and the accumulation of wealth will come after they learn the lesson of penny pinching.”
This common thinking is unfair, unproductive, and unrealistic. These same children are expected to work 60 trying hours a week for low wages while their peers who work for non-family employers enjoy the benefits a growing income provides.
Compensation should be based on productivity, not status as a member of the family. In some cases, children react to below market compensation as a statement that Mom and Dad don’t love them. This may seem ridiculous on the surface, but it is a fact that in the complex environment of a family company, monetary compensation can be seen as a benchmark of parental acceptance and affection.
Some family businesses with multiple children-employees pay each of the children the exact same thing in spite of the fact their responsibilities within the company are different. This is an effort on the part of the parents to be fair. Nothing could be more damaging to the children’s relationships with each other than this “equal is fair” arrangement. The children know who works the hardest and most productively.
To assure a high probability of family harmony in the business, compensation plans should be based on responsibility, productivity, and what you would expect to pay non-family members.
Entry rules into the family business for young children can be a big help in defining compensation arrangements:
- The duties and responsibilities for each position should be defined and documented.
- Family companies should not create make-work jobs for family members, but rather should hire for positions based on legitimate needs.
- There should be a formal training program, and family employees should be supervised by non-family members.
- Family members should have access to fringe benefits and bonuses like other employees, but should not be rewarded undeservedly just because they have the right last name.
- Family employees should be evaluated along with all other employees with respect to progress in their positions.
So, if you follow my expert advice you will design your compensation plan according to these five steps:
1. Establish detailed job descriptions for each employee. Include responsibilities, level of authority, technical skills, level of experience and education required for each job.
2. Recognize your compensation philosophy. Do you want to pay average, or higher? Are you trying to attract talent from other companies? Will you offset the typical male/female wage differential? Are you a training ground for young, inexperienced people?
3. Get information on the salaries for similar positions in the industry. Compare companies that are similar to yours in number of employees, revenue, product, geographic location, etc. What salaries and other benefits do these organizations pay their employees
Performance groups and trade associations are the places to look for this information.
4. Develop a succession plan. How will a successor to the current leadership be identified among family member/employees? What training will prepare them for leadership? How will this choice affect the morale of the family? What about the morale of the business? How will this successor be compensated?
5. Design an affordable plan. You want to do the best you can with the dollars you have. Decide now what you can afford to compensate each family member/employee relative to his or her contribution.
Don’t cause dissatisfaction and disharmony in your family company by failing to plan for these important future events. If you believe these issues should wait until the day they “must” be made, you are wrong. The path of least resistance will not work in family business planning. We’ve all heard the old adage, “The road to Hell is paved with good intentions.”
Remember, it is your direction – not your intention – that determines your destination, as Andy Stanley writes in The Principle of The Path.
Understanding this principle will make or break your family company.
David Lively, partner at The Lively Merchant, has over 20 years hands-on experience in the home furnishings industry, from the warehouse to the sales floor to the boardroom. He has walked the walk and talked the talk from the family-owned, single-site store to the multi-state, multi-million dollar operation; from sales training to computer programming; from warehouse construction and operations to financial management; from new store construction to complete renovation. Twice named to the "Beyond the Top 100" list of independent retailers and 1997 "Ohio Retailer of the Year," David's wisdom was won on the front lines of a furniture store and his battle scars have given him compassion for counseling today's retail warrior. David’s experience has led him to address the issues of the transfer of authority, responsibility and wealth from one furniture store generation to the next. Four out of five family-owned furniture stores are still led by their founder, and 40% of them will change hands in the next five years. The surviving legacy of your family business depends on your plan for transition, and David has developed a proprietary and unparalleled system for helping to identify goals, strengths and opportunities during this crucial time. You can reach David by calling 740.415.3192 or email him at davidL@furninfo.com.