Family business and the compensation conundrum

By Dave Specht, Contributor | Posted - Feb 23rd, 2013 @ 12:30pm

SALT LAKE CITY— “Dad, we need to have a talk about my salary. I think I should be paid more for the work I do.” Offended, dad responds, “Son, when I was your age I didn’t take a paycheck for six months to get this business started, and then when it got going I paid myself as little as possible to be able to grow the business.”

Does this conversation sound familiar? If it does, you are not alone. In family businesses there are stages that a business goes through that cause challenges and require changes to occur. Compensation is one of those areas that need to be discussed openly and needs to evolve over time.

Stages of the family business

Every family business starts as an entrepreneurial organization that may have one employee and a dream. If the business survives the entrepreneurial phase, employees are added, business structure and processes are introduced. As the business grows beyond the founder, job descriptions are developed, non-family employees are hired and compensation is determined based on the competitive landscape of the marketplace. If the business continues to grow and talented employees that are key to the ongoing success of the business get recognized as valuable assets, compensation packages are developed to incentivize employees to be loyal and to continue to grow with the company. This progression happens in family businesses just like in any other organization, except it is not always the same for family members that work in the business.

The experience of the founder and the memory of when things were tight doesn’t fade fast and so when the next generation comes back and expects to be paid a market wage for the job they perform, there is sometimes a disconnect. At times it is perceived that the senior generation is being “unfair” or too tight with the purse strings, while the next generation is accused of wanting too much, too fast. While both of these explanations may be true in some situations, they are not true in all cases.

The senior generation expects the next generation to make similar sacrifices as they did, because that is what made them successful. The next generation feels the need to be treated fairly from a salary perspective because they are many times not positioned to “win” in the same way as their parents when the company is successful. The next generation doesn’t necessarily benefit financially when the company’s equity grows. Ownership is sometimes slow to come, and so there is strain between the compensation package and the ultimate ownership strategy of the senior generation.

What is your true compensation package?

To begin this conversation, both generations should have a clear understanding of what the true compensation package is. For example, in agriculture it is sometimes the case that housing, utilities and sometimes use of acreage is made available to the next generation without paying market or sometimes any rent at all. If this is the case, it should be considered part of the compensation package. If cars, fuel and other benefits are a part of the package, they should also be included in the discussion.

It is important that both generations recognize what the other considers part of the compensation package.

Example: Son complains to his friend that he is only paid a $2,000 per month wage for working on the family ranch and he puts in 60-70 hours per week and is expected to not take vacations or time away. In the same case the father may complain to his buddies that his son doesn’t appreciate the rich compensation package that his son has. “We pay for his housing, electricity, water, his pickup and fuel, his kids have horses that we feed and we still pay him $2,000 per month, and he still doesn’t think it’s enough."

Both generations need to understand the needs and perspectives of the other and discuss what will work for them and what they value. The next generation needs to take into consideration the lifestyle and benefits that they have and use fair comparisons when they look at the compensation of their peers.

The compensation conversation is always a tough one. The balance of being competitive with pay, while assuring that the company is viable is a challenge. The reality of the senior generation’s “true” compensation package should also be considered. Did they really just pay themselves a measly salary with no upside when the company performed well? If the next generation isn’t participating in the upside of when the business if profitable, should their pay really be compared to what the senior generation’s pay was when they started in the business?

How much is too much?

There are a couple of different scenarios that business-owning families face with compensation. One is not paying family members enough for the role they fulfill; the other is paying them too much.

Family wealth advisor Paul Comstock, from Houston, Texas, cautions families to “pay a market wage for the job description that is outlined. It shouldn’t matter if the role is filled by a family member or not, the role should be paid at market wage.” Paul warns about the conflicts that arise from not compensating according to the specific role the family member fills.

Here are three possible challenges that Comstock sees in working with business-owning families regarding compensation.

1 — The next generation feels like they are getting something they don’t deserve and this actually will hurt their confidence in the long-run.

2 — The non-family employees who are peers will come to resent the family member that is treated better than they for doing the same thing.

3 — The business begins to be treated less like a competitive enterprise and more like a family piggy bank, leading to the ultimate downfall of the company.

These are challenges for each business-owning family to confront. The fairest compensation package is the one that is discussed in “apples to apples” terms in a respectful and open manner. When the generations appreciate the contributions of each other and when both are focused on adding more value to the business than their compensation package warrants is when success and harmony are found. Avoid the compensation conundrum by facing these issues head on and putting a plan together that is fair, competitive and communicated.

Dave Specht was professor of family business management at the University of Nebraska-Lincoln. He also owns Advising Generations LLC, a multi-generational family-business consulting firm. Dave is a speaker and writer on the topic.

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