Beyond The Box Thinking for Family Business Compensation

#1: The Full Role Should Determine Compensation, Not Just the Title

Your children aren’t just doing a ‘job’ when they are on a leadership track. They are enabling a succession plan—a plan that they will benefit from themselves, but which also creates value for the entire family and for future generations.

In addition, since they may identify strongly with their family business and see their role as an integral part of the family legacy, they are likely committed to it more deeply than non-family employees. When the going gets tough, they won’t put their résumés out on the street—they’ll more likely roll up their sleeves. Family employees are almost always ‘on the clock’ even after hours, during family vacations, and at holiday dinners. Managing family dynamics concerning the business is part of their job and that work is not limited to 9-5.

Finally, because they have grown up in the business, rising gen leaders may have valuable relationships with key employees, strategic partners, important customers, as well as historical and technical knowledge of the company and its products and services. Their presence at the company can give these stakeholders confidence that the business is stable and reliable for the foreseeable future.

While these factors don’t speak directly to compensation, they do speak to the value that the right family member can bring to a leadership-track role. For some families, this can inform the conversation about compensation and may support a compensation package at the higher end, or above, what a typical compensation specialist might recommend as the standard for a specific job title.

#2: Weighing the Short-Term Risks/Long-Term Benefits

Rising generation leaders carry the burden (some may say, ‘privilege’) of being the standard bearers of family values in the office. This often means that they don’t have the same freedoms they would have in another company. They can’t socialize the way they might in another company, and they must avoid behaviors that might give the appearance of entitlement. They constantly have a spotlight on them and a target on their backs—all while having to constantly manage complex family dynamics and relationships.

Committing to a leadership track in a family business can also be a professional risk for the rising gen member because entering a family enterprise is often a one-way street. If it doesn’t work out, and the family member needs to put themselves back on the job market, their résumé may be viewed with suspicion. Prospective employers might wonder why the family member couldn’t succeed in their own family’s business and this raises red flags.

In addition, if the family business is in a niche industry or in a small, remote location, the skills and network they develop may not be easily transferable to the mainstream, professional track that they may have once had access to out of college or grad school.

These challenges, burdens and risks might speak more directly to the need for a thoughtful severance plan for family members than it does to direct compensation, but it is clear that objective compensation metrics alone (i.e. typical salary range for job title) are simply data points to be considered, and may not be sufficient to fully inform the conversation about compensation.

#3: What Constitutes Competitive Compensation?

How should senior leaders recruit leadership-track family employees when that rising generation candidate has career options that may be more fun, less stressful, and better aligned with their near-term personal and professional goals? Certainly, the family business may offer incomparable long-term career and wealth-building opportunities, but what do senior leaders need to consider to make the near term both compelling for the rising gen, and successful for all?

One approach that many families use is to include existing compensation as a data point if the family member is currently employed elsewhere. For example, the business leader may decide that they should match the salary of a family member currently employed at a larger firm in a different, but related, industry to attract them to the family business. While their new role may not merit the same salary, the candidate may require it in exchange for their commitment to join the business. It may be important that the candidate not reduce their lifestyle to join the business despite the promise of future benefit. This can be especially true for rising gens coming from consulting, law or investment fields.

For family members who are not yet in the workforce, additional data points might be needed. For example, “John” is a newly minted MBA graduate from Wharton, with plenty of relevant experience prior to business school, and is considering entering the family business among other opportunities. Of course, there are advantages to having the candidate work outside the family business for a time, but this is not always the case (yet another, so-called, ‘best practice’). Sometimes it makes sense for the candidate to join directly. In cases like this, the business could use the range of starting salaries from his graduating class (often publicly reported) as a data point. In this way, the candidate can be assured that he or she is, at least, not falling behind their peers regarding compensation.

#4: Ensure That Compensation is Reasonable Relative to Other Employees

Compensation for leadership-track family members must be defensible with respect to non-family salary ranges. It can be higher for many of the aforementioned reasons, but care must be taken in communicating both the candidate’s role (beyond title) and compensation so that family member compensation does not create distrust among non-family employees or expose family members as entitled. Don’t assume that family compensation can be kept secret.

Care must also be taken that the relative salary differences among family members are reasonable. For example, a higher salary might have been required to entice one valuable family member away from their high-paying job, whereas another family member may have been easier to recruit at a closer-to-market rate for their job description.

While this may cause disparities upon entry, consider strategies for aligning family member salaries over time. Some family companies cap salaries for family members and provide additional compensation through distributions, bonuses or merit-based compensation.

#5: Consider Family Members Outside the Family Business

A final area of concern is how family-member compensation appears to those family members who have chosen not to work for the company. They may be board members or current/future owners and they may have strong opinions about how family members should be compensated.

It’s important to maintain the right balance so that family members feel free to pursue their own career interests. When the economic benefit of working at the company overwhelms their own career interests and personal goals they can be tempted to walk away from what might make them happier and more fulfilled. Family members outside the business must feel confident that their family members in the business are working to provide them with distributions so they aren’t left behind in building wealth as owners or potential owners. They also need to know that their family members in the business (while well paid) are being compensated according to a reasonable (not arbitrary) policy and that the policy has been reviewed and approved by a board or group that is looking out for minority interests as well as the company’s interests.