Rewarding The Family 'Sweat Equity'
1st April 2017 Clayton Hebbard
Dealing with the question of fair remuneration for family members...
The family controlled company usually represents an enviable source of financial independence for family members active in the business. However, the question of fair remuneration for family employees is an important and potentially divisive one.
What should be the basis for establishing salary levels of family employees? How do you reward 'sweat equity'?
Family members employed in the business should be rewarded in accordance with sound business principles - a pay cheque in the family business is often confused with return on ownership, parental concern or a method of achieving an emotional goal.
Remuneration should be divided into two components:
1 - Basic Remuneration, which is market related
2 - Performance Bonus, for meeting predetermined objectives.
Family members employed in the business should be made aware of the difference between seeking to satisfy a lifestyle to which they have become accustomed based on the family wealth as opposed to performance-related remuneration as an employee in the family business.
Underpaying a family member in order to impose discipline or keep control has very negative effects. It demoralises the family members and can result in lack of credibility amongst other employees. Family businesses should consider the introduction of a formalised remuneration committee, as well as the terms and conditions of employment.
There are a number of causes of problems in the remuneration paid to family members:
- Confusing pay-outs to family members in their roles as owners or family members with compensation for performing a job in the business
- Using high salaries, perks or 'phantom jobs' to transfer tax deductible wealth to family members
- Using pay cheques to convey messages or accomplish goals that have nothing to do with the market value of the job performed - for example, luring reluctant children to work in the business, or pressurising children to learn the importance of frugality
- Assuming that it is always indiscreet, impolite or wrong to talk about how people working in the business are paid
- Assuming that one can draw as much compensation from the business for as long as one needs it to support the retirement lifestyle of one's choice
- Assuming family members will respect and be satisfied with their pay just because they are family members
- Offering titles or perks to appease family members unhappy with their pay.
Steps in building a compensation plan:
- Decide on a philosophy of compensation, including whether to pay family members equally or according to the market value of their jobs
- Determine the market value for particular jobs
- Consider whether pay should be set at market average or whether a 'cultural statement' will be made with pay at levels above or below the market average
- Adjust pay to reflect qualitative characteristics of the job: does the job have strategic importance?
- Decide if an annual incentive plan is on offer, based on personal goals and/or company performance
- Establish classifications and criteria for assessing company performance
- Communicate clearly to the entire organisation and family the philosophy of compensation and an intention to review and refine the plan on an ongoing basis.
As to the entry of younger children into the business, if there is a discrepancy in children's pay cheques, parents may have to provide good reasons. Non-active family shareholders may question or resent active family shareholder's pay.
A decision to attract non-family managers raises questions over compensation, perks, incentives and share ownership.
The retirement of a business owner who continues to draw a salary may lead to frustration by the successor, who feels unable to control payroll costs.
An entrepreneur's frustration that employees expect routine annual pay rises regardless of the business' profits often sparks a plan to link pay more closely to company performance.
Clearly the issue needs to be addressed and communicated clearly to all concerned to avoid any potential misunderstandings too.
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