What are some of the methods for establishing compensation in family businesses?

Most family businesses use a nontraditional approach for rewarding family members. We often work with businesses that offer family members a compensation package that combines what the business can afford with what the family feels is a monetary amount suitable for supporting a reasonable lifestyle for each family member in the business. Too often family members are either highly overpaid or grossly underpaid for the level of their responsibility. In either case, it is unusual for any member of a family business to find comparable compensation for the same set of tasks conducted outside of the family business. It is also unlikely that a nonfamily employee will receive the same compensation as a family member even though he or she performs the same tasks or has the same responsibility.

An overpaid family member wishing to leave the family business must consider that changing employers will most likely change his or her lifestyle. Few people are willing to make such an adjustment; often the family member becomes a "prisoner" of the business. The result can be deterioration in the quality of the family member’s life, which compounds an already stressful situation. On the other hand, an underpaid family member may be trapped by a sense of obligation to stay. Leaving the business at a time when higher compensation is not possible can be compared to abandoning the family at a time of need. In both instances, resentment builds among the family members and within the company.

To avoid such dilemmas the family needs to set fair and reasonable compensation standards for family members before they enter the business; if the problem already exists families must address the issue immediately. Changes in compensation policy may not create dramatic changes in overall dollar flow but lack of sound compensation practices can profoundly impact the family and its business.