What Is the Best Method of Compensation for Family Owned Businesses?

Business Leader Post, June 21, 2013

Thomas D. Davidow, Ed.D.

The most frequent mistake that family owned businesses make is to pay either too much or too little. On the one hand, family members can be valued as family members, but somehow, transferring that value to their contribution to the business is undervalued. On the other hand, it is also a mistake to determine compensation by the number of grandchildren family members have and/or by the wish to have family members benefit from the success of the family business by creating a lifestyle that is not attached in any way to their contribution to the business.

Although fixing or addressing those distortions is not possible through this article because they are symptomatic of more complicated family issues, here is the main issue: Do you pay all siblings the same, or do you have their compensation attached to their responsibilities or authority within the business? Either position can cause problems for the family and the business because the first system is driven by family relationships and the second by objective business metrics.

I worked with one family in which three brothers who had different responsibilities were paid the same. That caused family stress. Consequently, a compensation assessment was done which compared their positions and salaries to those within their industry. They all thought that was fair and the problem was solved.

In another family, five brothers were also compensated equally. They also had different responsibilities, and it was clear to me which brothers added significant value to the business and which did not.  When the issue arose of possibly changing the compensation to reflect those differences, the threat to family harmony and its impact on the business became palpable. The brothers who were due to have their compensation backed off immediately. The value of family harmony trumped all other issues. Problem solved.

The answer is that each family business has different values, and the compensation system has to be a reflection of those values. What both of these families had in common was their willingness to discuss the issue and to come to a resolution versus allowing an unexamined compensation to produce unspoken tension that could interfere with the family and the business.