Why are Compensation Issues Complicated?
The short answer is: they’re complicated because money is something everyone has an opinion about. It’s also a yardstick by which workers – and family members – measure themselves. Furthermore, all family members in a family business feel entitled to opine on compensation issues regardless of whether they are shareholders or actively involved with the running of the business.
Unfortunately, as a family business grows older and more established, it gets harder for all the family members among the different generations to agree about compensation. When a family business has been operating for four or more generations, a multitude of people will weigh in on what people should be paid as if the company were a democracy. The fact that the business is not a democracy and isn’t run as a democracy doesn’t prevent this from happening. All too often disagreements about compensation can cause infighting and dissatisfaction in the company and affect performance and profitability.
The solution to this problem is for the family to determine compensation based on the market value of each individual family member. There are many benefits to letting the market decide who should be paid what.
Exit Coach Radio Podcast
In this podcast Vincent talks about family compensation and why it’s important not to let “family values” overly influence how family members are compensated. He discusses using benchmarking tools such salary.com to determine what people are worth and should therefore be paid.
It’s important to have a structure of compensation in place that includes documentation, end of year benchmarking, and regular reviews. When a system of this type is agreed upon and implemented, it becomes an objective standard that family members can refer to and can be used to mitigate squabbles among family members.
Click here to listen.
How Does Tying Compensation to Market Value Simplify Transitions?
When it comes time to transition a family business, it’s often harder – much harder – to discuss compensation. This is why communication is so important and why creating a compensation plan is vital during this transition stage.
If compensation is not tied to the market value of employees, family members will try to manipulate compensation and tie it to family members’ relationships with each other, personal histories, or financial need in the moment and longer term. In most families, aggressive bargaining and emotional blackmail will eventually crop up. This is even more likely during a transitional period when leadership is in flux.
Younger family members may not realize that their parents or grandparents may have not taken an income during the earlier years of the company. They sacrificed to build it, and they deserve a structure that pays them for what they put into it. Bringing the family together to discuss all the issues involved in compensation alleviates a tremendous amount of tension, confusion, disruption, and lack of production inside of the business. This is a very simple solution to a complicated family problem. Unfortunately, it’s not often done.
When transferring ownership of the business to the next generation, different options for compensation of younger family members exist via a percentage of shares or assets. These options can be implemented in order to avoid losing equity to taxation and to continue to drive value inside of the business. Family members have to take steps early on and be proactive to take advantage of them.
Prometis Partners would be happy to talk to you about the challenges your company is experiencing with compensation as well as any transitional planning you may be anticipating. Money is a hard topic to discuss, and we have found that bringing in an outside, objective voice can be helpful in guiding this essential communication process.