Family Business

Compensation issue can be tricky in family businesses

November 24, 2012 

The end of 2012 is coming to a close. For businesses this means performance evaluations and corresponding pay raises. Or not.

Compensation in the family business is one of the trickiest areas to address: How much should the kids make? How about when you are siblings? If Dad is starting to spend less time at work, what should his compensation be? For those who feel they are unfairly compensated, how do you bring up the topic without seeming to be greedy and selfish?

In one family business I know, the son has been plugging away trying to drive the business forward. He has taken over the leadership role but does not have any shares in the company. Since the performance of the company, and the industry as a whole, has been under extreme pressure, he has not had a raise in quite some time. However, the situation is becoming awkward: He is now in the position to be able to work elsewhere for substantially more income than he is earning now. And since he does not have any equity ownership, if his parents were to die today, he would simply receive his pro rata portion of the estate. (In the meantime, his other siblings work elsewhere and garner a much higher wages.)

In another family business the son is the top administrator and, regardless of evaluations, raises have ended. There is a feeling that he is already at the top of the income bracket for his position. In yet another family business, there are up-and-coming company leaders, but they are still quite young. They are feeling they deserve a higher wage.

Look at market

Unfortunately there is no one single answer for compensation within the family business. The Harvard Business School answer applies: it depends. But there are some rules of thumb:

Try to establish an open understanding of how compensation will be dealt with. Be open about what factors are important in determining the total compensation.

Determine as best you can what market value is for the position. This can be acquired through an HR professional, but a rough idea can be found through a salary calculator or contacting friends at similar companies.

Avoid the temptation to overpay. It sets a bad precedent, is difficult to reverse, and is impossible to explain to non-family employees who may be more deserving. If you want to provide more income, provide it as a gift through the IRS annual exclusion.

If there is insufficient cash you can consider providing some equity. Owners can be overly gun-shy about giving equity. As a family business it is important to understand that minority ownership creates little to no say about the operations of a business. Thus there is no loss of control. However, it does provide a sense of “ownership” on behalf of the recipient. Moreover, it is an excellent estate planning mechanism.

Beware of tax impact

On this last point, I am sure you have heard about the looming fiscal cliff where tax rates may go up. While there is not much time left, attorneys are standing by to assist you. You might not be sure where you fall on the spectrum, but many of my clients are distributing some shares simply as insurance against a significant future rise in rates. Five percent to each of four kids, with an additional 2 percent going to the two who currently work in the business. The purpose of the additional 2 percent is that the company really cannot cough up the cash flow at the moment, or for the foreseeable future, so this is some additional compensation to account for their contribution to the company.

Finally, as always, the most important part of any family business compensation situation is communication. Do it offsite, and allow for enough time to talk it through. Don’t discuss numbers, but discuss what each feels is relevant to earning compensation, and what is not. Money is always an awkward topic, especially when discussing how much I should get and how much you should get. But guessing at compensation without an open understanding of what factors contribute to it can create a misunderstanding, suspicion, and animosity.

Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. He can be reached at Familybusinesscarolina.com.

News & Observer is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service