Compensation is a hot and emotional topic for business owners, their children, and employees. No matter how you balance the bottom line, the thin line between family and business can become more difficult if a compensation policy is not clearly defined. Did you know that compensation ranks within the top three most frequent sources of conflict especially among the second and third generation members? When compensation and benefits are perceived to be unjust or inequitable, you can expect all forms of conflict to follow.
In a pre-pandemic W+B survey related to how founders compensated their children, we discovered that six out of the 10 family businesses were compensated below their market salary grade. The remaining 40 percent were shamefully overpaid, way above the children’s experiences and competencies. And out of all the first-generation client businesses surveyed, 80 percent disclosed that they were paying their children equally bereft of any performance metrics. When we did a parallel survey of the second generation members, a whopping 75 percent showed displeasure on the way their parents compensated them. Their main reason is the structure is so disadvantageous to family members that are performing. They also added that it is a forbidden topic yet divisive. One family member even remarked, “Our papa does not know this yet, but the damage this poorly crafted, old Chinese way of compensating us has affected my relationship with my other siblings. It is just sad!”
Fair is equal but is giving equal compensation fair?
The survey also demonstrated that founders are often in a bind on how to compensate their children. To play it safe, founders would always equate pay based on the age of the children, the older the adult child is, the more perks the child and his family gets, not necessarily on the salary but on the benefits. These are dangerous metrics as they breed entitlement and nepotism. But how much should these adult children be paid? Are there rules that business leaders must follow to minimize favoritism?
In one diversified family business we helped in Thailand, siblings in different roles were paid the same amount to keep the peace. The situation came to a head when the youngest sibling, Ed (not his real name) fresh from his MBA stint in Europe started to complain about the unfair compensation structure that the family has been employing for years. He questioned the pay of some of his siblings who were underperforming, but Ed ended up ostracized for being ungrateful so he decided to pack his bags and go back to Europe. When we intervened, his position was clear, “I know what I expressed to my father was considered disrespectful, but what can I do? We were taught corporate best practices in business school, so I had to be truthful. I raised the matter so we can correct this injustice.” It took me more than a year to get him back to the fold and another year for the family to finally embrace a proactive well defined W+B family compensation policy based on meritocracy. For Ed, it was unacceptable for his father to marry fairness and equality, especially when other siblings were excelling and others were not. When left on its own, we can expect this problem to naturally worsen when succeeding generations enter the business.
The old way breeds conflict
It is clear that many founders instinctively based their compensation policy on the notion of what’s best for the family rather than on what is best for the business. To these leaders, pay is based on the needs of the offspring. When compensating these children, fairness is generally taken to mean equality in pay and benefits regardless of the individual child’s contribution. Even when there is no performance, pay and share in the profits continues because “That’s how we have been doing it.” This is nepotism at its worst when you carelessly create two sets of employees: an employee who happens to be a relative devoid of any accountability and another employee, a non-family, where he is expected to perform lest he become a liability. Without science and guidance from experts, what or how you pay family members in the business creates a multitude of problems. This old family compensation model must stop.