It’s common knowledge that money is one of the biggest sources of conflict in a relationship, and the same holds true in a family business. It’s easy to determine how to pay an employee you have no personal attachment to, because their work and experience should speak for itself. But as soon as you have to pay your loved ones for the work they do, tension, conflicts of interest, and other problems can readily present themselves.
With many family businesses being run by a parent, it’s all too simple to fall into the trap of treating your adult children like, well, children, and treating their compensation like an allowance. An early client once told us that they paid all their children equally because they “loved them all equally,” and gave a premium to the eldest because he had the most children to feed. This type of thinking can make sense as a parent, but if not all your children are performing equally as employees or doing the same type of work, this can result in hurt feelings, in-fighting, and family drama – all things you want to avoid as a parent and as a business owner.
When it comes to paying your family members (and especially your children), family ties are only one part of the compensation equation. It’s vitally important to step back and look at all the factors that go into making an objective, fair, and supportive family payment plan.
When it comes to paying your family members (and especially your children), family ties are only one part of the compensation equation. It’s vitally important to step back and look at all the factors that go into making an objective, fair, and supportive family payment plan.
The Four P’s of Compensation
At Hubler for Business Families, we’ve laid out a straightforward template for you to follow when deciding how much to pay your family members. This is a proven system that takes into account skill, experience, and your familial relationships to create compensation structures that will make everyone happy:
Position – It’s easy to think of your children as your children rather than as, say, your General Manager or your Marketing Coordinator. But not valuing what a position is worth is an easy way to accidentally over- or under-compensate your adult child. Before you do anything else, sit down with your accountant and go over what the average compensation is for a given position. You’ll likely find a payment range that lays out what the upper and lower limits are for that position, and this should be your starting point. By starting your decision-making process using statistical data, you’re basing your final decision on an impartial source, avoiding sticky situations like overpaying a family member relative to comparable non-family staff or underpaying because you “didn’t make nearly that much when you were their age.”
Percentile – From this range, you’ll next want to determine what percentile within that range you want to shoot for. If a typical Bookkeeper makes between $35,000 and $45,000 a year, do you want to pay your adult child the Bookkeeper on the lower end because your business runs thin margins, or on the higher end because they handle more responsibilities than your average Bookkeeper? This is just one example of the huge range of factors that can come into play when determining what to pay your family member.
Performance – Here’s where you’ll really want to start treating your family members like every other staff member, and as such, it’s where you may really need to step back and remain impartial. Does your family member go above and beyond in their work and deserve to be paid more than other family members? If all your children work in your business and you’re intent on paying them the same base salary, a bonus structure may be a good idea to reward hard work without hurting feelings. You have to decide now if you’re willing to implement a higher pay grade or a bonus structure to incentivize your family members to work just as hard as anybody else.
Premium – Lastly, this is where you can really let your family ties influence your decision making process. As a business owner, it’s your right to employ your family members, and it’s well within your rights to want to support them. Decide if you want to pay your family members a premium because they’re your family. You can choose to do so, or choose to abstain, but the important part is that this only becomes influential after all other steps are taken, so that it only stays a factor in otherwise impartial compensation, rather than defining it from the get-go.
A final note about ownership and succession planning as it relates to compensating your family members: We often hear of family businesses run by parents that drastically underpay their children because “they’ll own the business someday” or because “they’ll have stock in the company.” Underpaying with a vague promise of future ownership can foster resentment, especially if the family member eventually decides to no longer work for the company. While compensating family members in stock or control of the company can be perfectly valid, this should not be a nebulous, ill-defined factor in determining their current pay rate. Compensation through ownership can be determined by remembering CIA (Control, Interest, Appreciation), and should always be laid out clearly in writing, and be kept completely separate from the Four P’s of Compensation.
With these templates at your disposal, you should now be able to craft compensation plans for your family members that take into account not only your personal affections, but also the needs of your business and the economic realities of any employee-employer relationship.
For more information on the B.O.S.S. system and more practical solutions to the problems unique to family businesses, contact Hubler for Business Families today to set up a free orientation meeting with Thomas Hubler, the expert on family business planning.
Position – It’s easy to think of your children as your children rather than as, say, your General Manager or your Marketing Coordinator. But not valuing what a position is worth is an easy way to accidentally over- or under-compensate your adult child. Before you do anything else, sit down with your accountant and go over what the average compensation is for a given position. You’ll likely find a payment range that lays out what the upper and lower limits are for that position, and this should be your starting point. By starting your decision-making process using statistical data, you’re basing your final decision on an impartial source, avoiding sticky situations like overpaying a family member relative to comparable non-family staff or underpaying because you “didn’t make nearly that much when you were their age.”
Percentile – From this range, you’ll next want to determine what percentile within that range you want to shoot for. If a typical Bookkeeper makes between $35,000 and $45,000 a year, do you want to pay your adult child the Bookkeeper on the lower end because your business runs thin margins, or on the higher end because they handle more responsibilities than your average Bookkeeper? This is just one example of the huge range of factors that can come into play when determining what to pay your family member.
Performance – Here’s where you’ll really want to start treating your family members like every other staff member, and as such, it’s where you may really need to step back and remain impartial. Does your family member go above and beyond in their work and deserve to be paid more than other family members? If all your children work in your business and you’re intent on paying them the same base salary, a bonus structure may be a good idea to reward hard work without hurting feelings. You have to decide now if you’re willing to implement a higher pay grade or a bonus structure to incentivize your family members to work just as hard as anybody else.
Premium – Lastly, this is where you can really let your family ties influence your decision making process. As a business owner, it’s your right to employ your family members, and it’s well within your rights to want to support them. Decide if you want to pay your family members a premium because they’re your family. You can choose to do so, or choose to abstain, but the important part is that this only becomes influential after all other steps are taken, so that it only stays a factor in otherwise impartial compensation, rather than defining it from the get-go.
A final note about ownership and succession planning as it relates to compensating your family members: We often hear of family businesses run by parents that drastically underpay their children because “they’ll own the business someday” or because “they’ll have stock in the company.” Underpaying with a vague promise of future ownership can foster resentment, especially if the family member eventually decides to no longer work for the company. While compensating family members in stock or control of the company can be perfectly valid, this should not be a nebulous, ill-defined factor in determining their current pay rate. Compensation through ownership can be determined by remembering CIA (Control, Interest, Appreciation), and should always be laid out clearly in writing, and be kept completely separate from the Four P’s of Compensation.
With these templates at your disposal, you should now be able to craft compensation plans for your family members that take into account not only your personal affections, but also the needs of your business and the economic realities of any employee-employer relationship.
For more information on the B.O.S.S. system and more practical solutions to the problems unique to family businesses, contact Hubler for Business Families today to set up a free orientation meeting with Thomas Hubler, the expert on family business planning.
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