Family Business Compensation Issues

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Davis Wright Tremaine LLP

Money and compensation are among the most sensitive issues that family business members face. Some of the pitfalls include using pay to maintain parental control and/or to resolve emotional issues, mixing compensation with gifts, and keeping (or trying to keep) compensation a secret from most people. As a result, family businesses often deal with disputes involving bonuses, salaries, paid time off, and ownership interests (including voting vs. nonvoting interests).

With these factors and dynamics in mind, it is best to address family employee compensation issues early on—as left unhandled, these and other issues can arise in the future, often with even greater consequences. For example, take the situation where a family business owner pays their family employees more than the non-family employees for the same or similar positions/services. Reasons for disparate compensation between family and non-family employees may arise where there is pressure or a desire to reward family members or a family member feels comfortable indicating a need for a higher salary.

However, doing so may add fuel to a "compensation fire." The non-family employees may resent being paid less or not receiving similar benefits, and this can impact the culture of the family business. Likewise, once a pattern of paying family members more is established, it can be difficult to adjust expectations if the family business later decides to balance salary levels between family and non-family employees.

Instituting good compensation hygiene can: prevent inter- and/or intra-family discord; minimize the likelihood of non-family members feeling under-appreciated, under-valued, under-paid, and resentful of actual or perceived nepotism; and aid in hiring and retaining talented non-family employees. Among the questions a family business owner should ask themselves in order to avoid a "compensation fire," or address an existing one, are the following:

  • Does the family member's position fill an important business need?
  • Was the family member the most qualified person for the position out of all the available candidates?
  • Were any compromises made for the family member when they were hired?
  • Would the family member get any job offers at a non-family business for the same position?
  • Are there any unaddressed performance issues for the family employee?
  • Is there a valid business reason to pay a family member more or provide benefits (or more benefits) to a family employee which would result in disparate pay and/or benefits provided to a non-family employee?
  • Is the family member's compensation reasonable in the sense that it is commensurate to the services rendered and aligned with what other comparable companies are paying for the same or similar services?
  • If there is more than one family employee, is compensation paid to all family employees fair, relative to such employees' respective positions?
  • Are family employee compensation adjustments commensurate among all family employees and non-family employees?
  • Are family employee promotions merit-based, such that the same standards for non family employee promotions are applied to family employees?

When implementing a fair and rational family employee compensation strategy, items such as work experience, education, loyalty, and performance should be part of the equation. The family business owner may also wish to engage in a collaborative process by seeking input from everyone involved in the company, including both family and non-family employees.

As Mr. Murak suggests in his article, to assist with ensuring compensation fairness, the family business owner should create and review a comprehensive list or chart of all employees with their respective total compensation (including benefits, if any). It may be beneficial to share the completed compensation strategy with all employees.

Doing so will reassure non-family employees that their compensation is not lower than a family member doing the exact same job; family employees will be secure that they are all being paid fairly in relation to one another; and family employees will be motivated to preserve and improve productivity because their compensation depends on it.

Compensation can be an emotional and difficult topic for both business owners and employees. A family business will be more likely to thrive, attract and retain talent, and avoid "compensation fires," if it takes the time to define and implement an equitable compensation strategy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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