How family businesses can solve the compensation puzzle

June 19, 2024

Every type of company needs to devise a philosophy, strategy and various policies regarding compensation. Family businesses, however, face additional challenges — largely because they employ both family and nonfamily staff. If your company is family-owned, you’ve probably encountered some puzzling difficulties in this area. The good news is solutions can be found.

Perspectives to consider Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others.

Second, family business owners may feel it’s their prerogative to pay working family members more than their nonfamily counterparts — even if they’re performing the same job. Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them.

Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences.

For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically. Ideas to ponder Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture and strategic goals. A healthy dash of creativity helps, too. There’s no one right way of handling the matter.

But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved. When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity.

Because working family members are generally in the company for the long haul, they’ll receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation. Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward. On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business.

So, higher salaries and a strong benefits package can be important to attracting and retaining top talent. Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term.

There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans. You can do it If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that’s reasonable and equitable for everyone.