One of the most challenging policy areas for families in business together is compensation. As with many issues, approaches tend to be divided into two camps. Opinions and emotions can run quite high on both sides.
The “Market Camp” says that a market-based approach to compensation is the only acceptable and professional alternative. Family members should be paid what anyone else in their positions would be paid, and perquisites for family members are to be avoided. According to this view, any other practice is uncompetitive, is unsustainable, and jeopardizes the success of the business.
The “Family Camp” insists that special considerations in family compensation are legitimate and appropriate. The family may decide to pay family members approximately the same salaries no matter what their positions, in order to preserve family harmony. Alternatively, family members may be paid a premium wage or receive special perquisites such as paid memberships to a country club, extra vacation time, or the use of company resources such as cars. These special rewards recognize the extra burden of ownership borne by family members, who often put in many extra hours of work during evening and weekend community and family events.
Wise and experienced families find it impossible to embrace one of these two approaches to the exclusion of the other. They seek to operate in a way that balances the wisdom found in both approaches.
In addressing this dilemma, a polarity map (originated by Dr. Barry Johnson) is very helpful. As we have discussed in prior issues of FBA, polarity maps help us to appreciate complex ongoing challenges that involve contradictions that must be managed, not problems that can be directly solved. A polarity map that helps us appreciate the Market and Family perspectives on compensation in a family business would look something like the chart at the right.
By looking at this polarity map, we can see the danger in choosing one alternative to the complete exclusion of the other. Although we may have a strong preference for one pole, we cannot ignore the wisdom inherent in the other. Upon some reflection, we can see that investing in one pole will strengthen the other. For example, market-based compensation approaches contribute to stronger, less confused family relationships. At the same time, monetary recognition and reward for the long hours invested by family members in support of their business can foster their support for a data-based compensation philosophy in the business.
Let’s provide a hypothetical but realistic example.
Joseph Construction Company is a preeminent Midwestern firm entering its third generation of family ownership and management. Several years ago, when the siblings entered the business, they embraced a market-based compensation approach. Their HR staff regularly adjusts family and non-family compensation based on regional and national salary surveys. Performance appraisals are conducted regularly and form the basis of salary decisions at all levels. The family sees this professional approach to compensation as a cornerstone of its continued growth and success as well as its ability to attract and retain top non-family talent.
However, over the years, the siblings have come to see the value of incorporating several family-based elements into their total compensation approach.
For example, performance reviews are standard practice throughout the company and provide an objective basis for salary increases at all levels. However, family salary increases are not tied to annual performance reviews, because the siblings have never really received performance appraisals.
Also, family member pay is slightly above market rates for their jobs. This is in recognition of the extra time and effort put forth by family members. They are all active in the community and spend many evenings and weekends representing the family and business at charitable events. They have also taken on the role of organizing family meetings and preparing the next generation for their responsibilities, much of which takes place outside usual business hours. These activities are critical in creating conditions for sustainable success. Family and non-family executives know about this “family pay premium” and recognize its value.
Although the company has a vacation and time-off policy that is strictly enforced for non-family employees, the siblings’ vacations and time off are not monitored or tracked. While none of the siblings abuse this privilege, none of them limit themselves to the company standard of two weeks of vacation per year. In fact, when their children are young, family members frequently leave work in order to attend their children’s events and tend to their needs, a privilege that is not extended to non-family employees.
Finally, all four siblings attend an annual family business seminar (often in exotic, luxury locations) paid for by the business, and this time off is not counted as part of their vacation time.
However, all these family-based compensation elements take place alongside a professional, rigorous, market-based salary and bonus system throughout the company. This hypothetical family illustrates a realistic and positive approach to considering both family and market-based considerations in total compensation of family members.
Every successful family business finds its own unique compensation approach. As you seek to establish your approach, be aware of the importance of balancing these two important forces. Which approach do you prefer? Are you emphasizing one approach to the exclusion of the other? If so, perhaps this article has offered you some ideas that can help you strike the most productive balance for your unique situation.