Are you hiring a child or an employee?

It's what separates a family business from the rest. But hiring family comes with plenty of danger if you're acting as a parent and not a boss.

When it comes to hiring relatives, family businesses are usually divided. There are two approaches: The first is to say that’s what a family business is all about, it’s there for the family. The second is to say it causes too many problems.

What are the issues and how should they be handled? Certainly there are pros and cons on both sides of the equation.

On the plus side, it can give the business a real competitive edge by having everyone so closely linked and motivated. Bringing children into the business gives them a start in life. Having family there gives more scope for flexibility when it comes to working ungodly hours or taking time off. When times are tough, family members might be more willing to take pay cuts or not have pay increases.

But experience for some has shown there are plenty of cons too. Disputes can arise when some family members are not working as hard as other family members or for that matter, non-family employees. Seeing the family getting all the favoured jobs can discourage non-family employees from pursuing careers there. Say, for example, the younger son might be worth $60,000 but is being paid $150,000 – seeing that demoralises the workforce who might feel it’s unfair, that there’s a glass ceiling and there’s no future for them in the business.

Also, criticism about performance or work habits from a family member might be harder to take. That can set off fireworks within the family.

Managing remuneration of family employees in comparison with pay for the rest also becomes an issue, particularly if some family members see themselves as different from other employees and don’t work as hard.

The first thing every family business owner has to do is determine why they want to employ a particular person. Is it because they genuinely believe that person can help build the dynasty and make a real contribution to the business? Or is it because they feel the person isn’t going to get a job anywhere else?  If it’s the latter, the whole approach has to be very different.

Management consultant Jon Kenfield, who specialises in family businesses, says those that don’t think it through will get into trouble later on.

“Families get into terrible trouble because they delude themselves that it’s a good thing for the kid, it’s a good thing for the business and it’s a good thing for family when it’s really a charitable exercise,” Kenfield says.

This can create huge issues for staff if that person isn’t placed in a role appropriate to their skills, or lack thereof. In cases like this, the family business owner has to manage expectations.

It would require some fairly tough discussions. If the business owner is smart, they would bring in an HR consultant, business coach or mentor to walk the recruit through what’s expected of them and set out a career path, with key performance indicators, objectives and deliverables. The important thing is to ensure that they don’t think they are better than they actually are. Then again, if they hit their straps, they would go on to bigger and better things.

Kenfield says families that get this right have an expectation that they will be getting 110 per cent out of the family member.

Family member employees don’t necessarily have to be better than the rest but they have to communicate more and show a higher level of commitment than the others. The family’s reputation and values are on the line.

And they have to be paid what they’re worth in the open market. This is where external remuneration consultants come into it.

If they get any other benefits, like income from a family trust, that should be dealt with outside the business. It’s a private agreement and that has to be spelled out in the family constitution or some other policy document so that everyone knows what the deal is.

One of the big causes of conflict here is in working out what to pay two family members. The worst thing they can do is pay everyone the same.

“A lot of families get really screwed up thinking that ‘all my children should be paid equally’ when you have got one of them who carries a lot more responsibility and works harder hours and puts more time and effort into it,” Kenfield says. “If you have someone who feels they are worth a great deal more to the business than one of their siblings, the one who is being overpaid will happily stay where they are but the one who is being underpaid or relatively underpaid, if they are any good, won’t stay.”

To manage that, the business needs a policy in place spelling out what’s expected of them and the careers have to be managed. Let us say for example the son is the CEO on $180,000 and his sister is the marketing manager on $120,000. She can be put on a bonus scheme and can advance to a higher level provided she hits targets.

In other words, it’s all done on a performance basis – as would be done in any business.