editing disabled

Compensation of family members refers to paying family members who work in the business. Compensation for family members who work in the business may differ from compensation for non-family employees -- and family members who work in the business may have different expectations regarding compensation than non-family members. Family members can find themselves in disagreements regarding compensation issues due to overlapping roles as employee, shareholder and family member. Having discussions about compensation can be stressful, but often results in greater understanding and stability for the family-in-business.

Challenges in the compensation of family members

Some commons challenges can be as follows.
  • Some family members believing that all family members in the business should be paid at approximately the same level, while other family members believe that compensation should reflect level of responsibility and performance.
  • Providing additional compensation to some family members and not to others in the business based on perceived need rather than based on level of responsibility or performance.
  • Compensation which is viewed as excessive by family members who are part-owners in the business but do not work in the business.
  • Compensation of senior-generation leaders who are semi-retired but still being paid at high levels of compensation.

Sources of confusion in compensation of family members

Much of this “compensation confusion” arises from role confusion: mixing up the roles of employee, shareholder, and family member. Compensation gets confusing when it is used as a tool for parenting (e.g., helping children who need more money; reducing sibling rivalry) or a tool to reward ownership (e.g., paying family member owners more than their jobs merit). These ideas seem appealing at first, and may work for a while, but they usually sow the seeds of future animosity and discontent.

Compensation as a business tool

Compensation is first and foremost a business tool – a tool to motivate employee performance and achieve strategic business goals. Family businesses which use compensation in this way find that both family member employees and non-family member employees can get excited about helping the business to grow and be successful.

This does not mean that a family business compensation plan needs to be rigidly tied to the market value of jobs as might be the case in a publicly-held company. Some family businesses may indeed decide to go this route and pay all family member employees at market value (with market value based on the complexity of the job and not just on the job title – because family member employees often receive titles far more grand than their actual jobs merit). Other family businesses may legitimately decide that all family members who are owners should be paid the same regardless of their job – to encourage a feeling of “partnership” and working together to grow the business and shareholder value.

Communicating about compensation

Most founders/entrepreneurs avoid talking openly with family members about compensation. They fear creating animosity between family members, or even fear that family members might question the founder’s compensation! This informal and secretive approach often blows-up when ownership and management start to transfer to the second generation. At that point it becomes impossible to maintain secrecy, and all of the suspected inequities come to the surface.

Rather than hoping that secrecy can be maintained, a better approach is to talk openly with employees, family members, family member spouses, and shareholders about the company’s approach to compensation: the business purpose of compensation; how compensation is determined; and how different jobs have different levels of value to the company (and thus are compensated differently). This is also the time to clarify for family members and shareholders that they are all responsible for their own financial well-being – and should not expect the business to be their “parent” and “help them out” when needed. Parents can, of course, help their children out, and shareholders can be rewarded for their ownership – but these roles should be clearly differentiated from compensation.

Sources and references

This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources.

Catgories: Compensation and benefits