We have seen how important fairness is when paying operational family members, now we look at how to reward those who are not involved in the business. Steve McClure analyses how best it can be done
A year ago, Roger Valdez – the entrepreneur owner of a successful food processing business – decided to put his three university student children on the company payroll. When his two oldest children – who already worked in the business – discovered his decision, they both argued against it vehemently, and one even called a board member to help dissuade Roger. Ever the entrepreneur, Roger ignored it all as it was his desire to share the success of the family business with all of his children.
To everyone's surprise, there was an unexpected result. Maria, Roger's youngest daughter in her first year at university, put it this way: "When we started getting these cheques, we felt guilty about taking money from the business and not working there."
Soon after the cheques arrived, the siblings rekindled their dormant Next Generation Committee, a forum created for the five siblings to work on projects needed for their success as future owners of the business.
After years of only token activity, they got busy and produced a family employment policy, a family code of conduct, and a written description of the family's contribution to the business's competitive advantage. The competitive advantage description was added to the company website, which now articulates how Valdez family involvement with the company translates into a better place to work for employees and a better supplier for customers.
As is the case for many unorthodox entrepreneurial business practices and those of family firms, the initial advice from business professionals about paying nonworking family members is predictable: "Don't do it. Pay is in exchange for work, and if you don't work in the business, the business does not pay you." And, for many family firms, that is good advice which is rigorously followed. There are sound reasons to follow the advice.
Paying members of the family who do not work in the family business may encourage entitlement – an expectation of guaranteed rights to business benefits. Non-family executives, managers and family members who work in the business are always suspicious of any benefit provided to family outside the business. Their concerns are well grounded. Educational expenses, automobiles, health insurance, as well as payroll cheques arranged by parents for their children who do not work in the business are practices that do not often come with an expiration date.
When these practices are eventually discontinued – usually by the founder's successor, accompanied by bitterness and lingering resentment – the family business leaders are not eager to send signals that could get misinterpreted as "we are back in the entitlement business".
For those who have never engaged in such practices, they worry that any benefits outside standard practice will put them on a slippery slope toward entitlement expectations.
Those working in the business often resent the "undeserved benefits" provided to the inactive family shareholders, and resentment seeds conflict. Shareholder conflict over who gets what or how much can mean the business is not paying enough attention to its competitors, employees or their customer markets.
A non-family CEO taking over the business from a group of cousins in a third- and fourth-generation forest products business put it this way: "A generation ago this business could easily support three families. Making sure all the adults got an automobile was accomplished by putting everyone on the payroll, and we were happy to do it. Now, there are ten families – soon to be more.
And the expectations have grown from a simple programme to provide a transportation perk, to funding education and mentor/coaches to help with careers, and an expectation that family members are first in line for internships and jobs. We worry about the growing costs and they worry about whether one family
member is getting a better car than their cousin."
Yet, for some business families, compensating those outside the business is not problematic. The business pays for non-traditional roles outside the business, non-family employees are pleased with the practice, and recipients of the compensation, as well as family members who do not, find it to be fair. Why does it work for some family firms and not for others? There are noticeable similarities in the successful families' profiles.
Mastery of Compensation Practices
If fair pay practices are not understood well for jobs inside the business, shareholders cannot be expected to fully appreciate pay for special roles outside the business. One family business leader put it this way: "We have invested time and talent to explain how money flows to the family owners. We have a family employment policy, there have been special compensation seminars at family meetings, which explain the mathematics of equitable pay for family positions in the business. We have also clearly identified the rationale for dividends to shareholders, that is, how they vary and how annual shareholder distribution decisions are made. Without this foundation of education and understanding, we would never have attempted to pay members of our family council."
Unless the difference between compensation and dividends is understood, paying family members working on legitimate projects outside the business will look to some as special treatment to the recipients. Families that master compensation knowledge also value transparency, and they make a point of communicating changes to their business compensation practices that affect family members. They redouble efforts to inform all of the rules for eligibility and the underlying rationale behind pay for roles outside the business.
A job that benefits the business
Business families who choose to pay members of their family councils, family shareholder liaisons, or family members who work on projects to enhance family unity and connectedness to the business, do it for the same reasons: they are getting a valued contribution in the exchange. Educating a new generation of future shareholders, engaging the broader family's capabilities in service of the family business mission, and family members taking active roles in developing succession plans and creating policy are viewed by these families as vital to the business and worthy of pay.
A steward is a family member that believes they are managing their ownership for the benefit of the other current and future family owners. It is the opposite of an entitlement expectation, and if a stewardship value is strong enough throughout a family, compensating inactive family members is not perceived to be a risk.
As one family member put it: "When I volunteered, I did not expect to be paid for my role as family council chair, and I was concerned about what my children might think when the board of directors made the decision to do so. When I expressed my reluctance they quickly reminded me of the hours I've put in just this week and how proud they are of the accomplishments of our council."
How do family firms establish fair pay for non-standard jobs outside the business? Contrary to the many resources available for jobs in the business, there are no salary surveys to consult for outside roles. However, standard compensation practices can be called upon to produce rough guidelines. Internal pay equity – a measure of fairness – is achieved when two jobs make similar but different contributions to the business and have similar pay ranges.
An accounting manager and a plant supervisor could be paid the same amount because their jobs are of similar value to the business' success. Family firms have made attempts to compare the job of a family council chair to that of a member of the board of directors but have often met with resistance based on the view that the roles are too dissimilar. Others have had more success with comparisons to jobs in the business.
A family board recently settled on a value of the family council chair's position and for council members using internal equity principles. They decided that for the work accomplished by a chair to organise and manage their family council, fair compensation would be $3,000, payable at each quarterly family council meeting: $12,000 annually.
The board reasoned that the role could only be held by a family member, yet the skills required were similar to those of a territory sales manager in their business. They knew that the best territory sales managers provided organisation to sales people who did not naturally work in teams, they mentored and gave encouragement, facilitated communication throughout the business, and gently administered accountability measures for goal accomplishment.
These were many of the same activities and strengths needed in a family council chair. Compensation for the other members of the family council was set at one-half that of the chair.
By far, the most common method for establishing pay for family members working in roles outside the business is through consensus among the family opinion leaders. If knowledgeable stewards agree on fair pay for a job that makes a recognised, valuable contribution to the business, then much is in place to support success and limit conflict. All that is needed is a family member candidate who is willing and able to do the job.