A whopping 80 percent or a vast majority of family business owners our firm WB Family Advisory Group surveyed are doing it all wrong. They are compensating their offspring equally purely based on their birthright. It does not matter if the skill set, competence, leadership and a bundle of essential metrics are absent, from all indications, equal pay appears to be the default option for many of these owners.
Noted clinical psychologist Lloyd E. Shefsky said: “The parental temptation to pay all offspring the same, regardless of their value to the business, leads to trouble down the road. Unless a child has an obvious and serious special need—all offspring tend to be treated the same. After all, notions of equality are deeply embedded in the American psyche, so allocating on any other basis seems unfair.”
Compensation problems seldom happen in the first generation or founding generation stage because owners are usually confined to the husband and wife tandem. Parents as owners and operators remain in full control and would set aside compensation in favor of survival and growth. All of those family enterprises surveyed belonging to the first generation stage embraced a founder mindset that whatever money that was earned should be saved and reinvested back to the enterprise. On rare occasions, when ownership extends to other siblings as co-owners/founders in this entrepreneurial stage, there is a likely possibility of complication. But at any time family members can be relied upon to sacrifice personal comforts for the benefit of the business.
Although siblings as co-founders does not happen often, unlike in the second stage where conflict related to compensation emerge, it is due to the fact that parents do not educate their children that salaries must be based on many fronts namely, financial and human resource needs of the firm, qualifications and market conditions. It was also established in our survey that the children do not have a solid understanding and appreciation of how they are compensated. For context and clarity, family members must know these:
a. Qualifications-based. The salary grade given to an employee, family member or not, is by and large based on qualifications and for a job performed;
b. Performance-based. The higher salary a family member receives is chiefly due to a certain performance yardstick measured based on Key Performance Indicators (KPI’s) plus his or her contribution to the organization;
c. Value-adding. The child’s entry into the business should never be solely by reason of blood. It is not automatic. The reason for an offspring’s admission is primarily because the business has a need for talent and the adult child’s entry has value adding qualities that can help the enterprise; and
d. Difference from Dividends. The child must recognize the difference between salary and dividend. Many are confused with these two concepts. A salary (or compensation) given to an offspring is based on his or her earned work while dividends are given as a result of the equity (or share ownership) of being an owner. The child with equity but is not working should never expect any compensation other than dividends. And take note, the latter is contingent on whether the business makes profits. Dividends are only distributed when profits are made. It is a sum of money paid by a company to its shareholders out of its profits (or reserves). A company’s dividend is decided by its board of directors and it requires the shareholders’ approval.
Without understanding the concept of compensation, the children end up disillusioned, confused, frustrated and constantly asking why their salaries are equal. That mindset becomes a prelude to a future showdown that can trigger old wounds and create real conflict. I use the word “future” because the bad feelings of the other siblings (crying unfair) may be deferrable (out of respect or fear for their founder) until the will is read. So if I were these parents, they should wear the hat of a less emotional business owner using meritocracy as a baseline and start changing their old, wrong and divisive policy.