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Should Compensation Be Equal ?

Dear Advisor:

Im wondering about the advice I'm getting from my Board. We are going through a transition from me to the next generation. I am now almost retired and my two sons have taken over management. The oldest is president and the younger is doing a great job as vice president of operations and also as general manager of our new product line.

Before I was sure what direction things would take in the next generation, I passed on my stock equally to the two sons and also to my two daughters (who now have chosen not to work in the company). My daughters want to be full-time, long-term mothers. So, the sons are currently buying out their sisters according to the plan we had in place.

That's not my issue. The issue is how much to pay my sons for their jobs.

Over the past years I have left that decision to my Board. They have done a good job setting pay according to job requirements. The Board included our retired CFO, our retired outside CPA, a marketing executive from a large company and a manufacturing executive from a large company.

Now my two sons come to me and say they want to be paid equally. The Board says "No, the CEO should get about 30% more than his direct reports." What do you think?

 


We're not surprised by the dilemma. Your approach was excellent while your sons were rising in management, while you controlled the stock, and while your daughters were non-employed shareholders. Your approach was also comfortable to your Board; they are all from non-family firms or from your era of leadership.

Now, however, things are changing. We suggest you leave the responsibility of the decision to your two sons -- assuming that your daughters are quite secure in their redemption. Let the sons work to persuade the Board.

They should develop some data on what other co-owned, co-managed family firms do. (Equal pay is very common.) They should persuade the Board that they are really both leading the business and that equal pay isn't just an easy compromise. We urge that the decision be made by the board because they should hold themselves accountable to the board. We hope the Board will be open-minded on the topic.

To maximize the value of your board, we suggest including at least two CEOs of other family companies on the Board -- especially at least one from a co-owned, co-managed business. Your sons will probably want to reconfigure the Board makeup over the years to come.

The Advisor

 

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