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We Need to Change the Compensation of Family Members

Dear Advisor: I'm a third-generation manager in a business transitioning from the second to the third generation. We have done a pretty good job of professionalizing our family business except in one area---compensation for family in the business. Our half dozen family managers receive pretty much the same low pay. Our non-family executives have good compensation packages). Is this situation unusual in family businesses? Why does it happen? And how do we address this matter?

Family businesses generally have a bias toward low pay for family members. Many are surprised to learn that family business owners/managers are more likely to be under compensated than overcompensated. And when multiple siblings work in the business, roughly equal compensation is not an unusual approach.

Any of several reasons can explain this behavior. Owners are often concerned about the health of their businesses and would prefer to leave money in the business rather than taking it out as pay. Many of these same owners/managers believe in living relatively modest lifestyles and don t need the pay. Family values also influence family compensation policies. A one for all and all for one philosophy leads to a sense of equality. All are expected to do their best regardless of pay---because they are family. The result is the paradox that families who are capitalists behave according to a fundamental principle of communism--- from each according to his abilities, to each according to his needs.

As the business progresses from the second to third generation, family compensation is often an issue that requires rethinking. When pay is roughly equal, next generation folks who couldn t make that much elsewhere may be attracted to the business while those who can make more may feel penalized if they choose to lend their talents to the family enterprise. Particularly when pay packages have been developed to attract and motivate quality non-family executives, family management comes to understand what market compensation looks like and can see how it might apply to themselves.

Don't overlook however, connections between family culture, shareholder relations and compensation. Now that Daddy s gone, you are certainly helping yourself to lots of money, is an often-heard complaint. Use your board of directors, particularly the objective, independent directors, to help structure an appropriate compensation program that includes family managers and to communicate the program's fairness and legitimacy.

Craig E. Aronoff





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