December 14, 2021
Family businesses will always be vital to the economic landscape. But because nearly every successful or growing family business also employs non-family workers, managing the operation is a balancing act that requires extra due diligence when it comes to fair and effective employee compensation practices. At Total Reward Solutions, we get frequent questions on this topic, so we wanted to share some of the essential answers we typically provide:
Regarding Compensation Philosophy and Pay Practices, Should Employee Compensation in the Family Business Be a Level Playing Field?
We’re often asked this question: “What’s the best way to establish compensation levels in a family business; and should both family and non-family workers be grouped together when setting pay scales and pay levels?”
Simply put, we recommend one pay scale for all employees. It is important to pay fair market value for each role, and family members should be compensated by the same rules as everyone else. In other words, family members should be paid based on their experience for their position, their education level, and their job performance, just like non-family employees. Unfortunately, because family-run businesses tend to grow and reward workers unaware of the true market value for their roles, we often see family members not paid as appropriate for the market. For example, if you must skip a generation for a CEO, it can become a big shock to the business when they must pay an outside CEO fair market value.
Also, while you might think it common to overpay family members versus their non-family counterparts, the opposite can also be true. We often see family business CEOs overpay or over-reward non-family members who have helped them grow the business. Although this sounds admirable, it can have the unintended effect of pricing the non-family member out of the market. This can cause imbalance within the organization, but can also create unrealistic salary expectations for the non-family worker who exits the family-run business and enters the external job market.
The other thing we see family business CEOs endeavor to do is to award a non-family member an ownership stake in the business; and this often upsets family members. Nonetheless, many CEOs who have built a business from the ground up want to pay who they want what they want and when they want. Naturally, they may not be receptive to unsolicited advice. To protect the company culture, there can be ways to award ownership to non-family members without giving up control or giving away voting rights. Consult with a business attorney to explore prudent options.
Regarding Profit Sharing, Incentives, and Bonuses, Should Family Members Be Eligible Along with Non-Family Workers?
When it comes to profit sharing, incentive pay, or other bonuses or financial perks, we advise that family members be included in the same plans as other employee groups with the same percent of pay eligibility or dollar targets. Family members can then earn additional compensation through distributions/dividends or long-term incentives.
What About the Next Generation of Workers? Should Special Rules Apply?
Again, provide compensation and rewards commensurate with their previous experience for the role they are performing. However, keep in mind that family members often get unique opportunities that their role might not otherwise qualify them for perks, such as special project work, the sharing of vital business information, opportunities to work in charitable entities, and the invitation to attend executive planning meetings.
Any Other Advice for Fairly Compensating and Providing Rewards and Opportunities in the Family Business?
Be sure to create a culture of professional development for all employees and give non-family members similar opportunities. Be transparent and embrace coaching of non-family members as well.
Also, be honest with family members regarding ownership and succession planning. And do not force family members to be involved in the business if they do not want to be there or it is no longer a fit for them. You will have the most success with family members if they are happy about the role they are doing. And don’t forget the importance of managing customer transitions from one generation to the next. This takes more time than you think it might.
The Bottom Line:
Whether the balance tips in favor of family members or non-family employees, remember that favoritism can be toxic for a workplace culture. Strive for fairness and equity in all areas of management and compensation. Be aware, however, that family members will often have personal pride as well as a professional stake in the business, so across-the board equity may seem like inequity to them. Therefore, consider holding quarterly family board member meetings to address any family issues and protect feelings.
To learn more about establishing and managing equitable employee compensation and total rewards programs in the family business, contact us today at 317.589.8529.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees, and retain top performers. We can partner with you on a project basis, on retainer, or as your total outsourced solutions provider for compensation services.