By Prof. Enrique Soriano
The driving force for any family business is to grow, expand and move the organization forward. But too often, when a sensitive topic surfaces like remuneration, the family suddenly looks inward and neglects the primary reason why they must constantly drive the business. On far too many occasions, family members will always focus on relationships.
Thought leader and family business consultant John Ward and his co-author Craig Aronoff highlighted a good narrative why family compensation is a very sensitive topic, “Compensation problems rarely arise during the family business’ first, entrepreneurial stage, because the parents remain firmly in control and determine all questions of compensation. But during the second stage (sibling partnership stage) problems develop. The causes are predictable: Either the parents haven’t taught their children that salaries must be based on credentials, performance, the market environment and the financial condition of the firm or the children do not appreciate the difference between salary for a job performed and dividends for equity as owners.”
For parents/founders, the key is to categorically explain to working and non-working family members the meaning of compensation and how it differs from a dividend policy. It is crucial to inform each that any pay structure should be directly correlated to performance. If the owners are having a hard time expressing their intention to embrace best practices, a third-party consultant will be helpful. I have listed some rules related to compensation to guide siblings, offspring, and other relatives, especially the parent/owner:
- Family members that are working outside the family business should not expect any remuneration or allowance from the family business
- The pay structure of working family members should be commensurate to their job descriptions and scope of responsibilities, as well as their entry credentials
- Pay (and incentives) is not a one size fits all approach, nor is it defined based on the age of the family member
- The company that adheres to best practices must follow a differentiated pay model among family members where a higher pay model is provided to performers and a standard pay structure is given to underperforming family members
- The family business should provide an incentive plan to further motivate the performing family member
- An underperforming family executive should be made accountable and can expect a demotion, suspension, and even termination for failing to deliver based on his department’s business plan
Why do I espouse these ground rules? Fundamentally, the compensation conflict stems from the fact that the role of each family member was never clearly defined from the very beginning. These offspring may have been lured, cajoled, or even forced into the business with no outside work experience. I have witnessed first-hand accounts where children clashed and demanded higher pay without regard for the financial health of the business immediately after their parent/founder died, leading to constant skirmishes during board meetings. The fault lies in the business leader not setting the rules early and the children having zero knowledge on something as sensitive as compensation. To these successors, higher pay is a birthright whether the business is profitable or in the red.
During the pandemic, many irregular practices reared their ugly head. There was a case of a family member assigned to manage a revenue-generating business unit who refused to report for work for fear of being infected with COVID-19 but still received pay. After being admonished in one of the family council meetings where I sat as an honorary member, he ended up vigorously defended by his father, to the dismay of the other hardworking offspring. Another case wherein the resignation of key senior non-family executives occurred was when the founder ordered a pay cut of all its 5,000 employees… except for his children! These two cases magnify the evils of nepotism and how parents/leaders apply double standards when it comes to their flesh and blood.