Avoiding the payment crossfire

Pay disputes are all too common in family businesses. Having a well-prepared plan for remuneration can help keep family and non-family workers united.

Remuneration is one of the most divisive issues in family business.

Just think of the disputes: family members working for the business getting paid more than non-family employees, family members working for the business getting paid the same as non-family employees but putting in more hours, family members employed in the business failing to perform, family members who don’t work for the business getting paid through dividends and trusts. Then there are the family members who are not being employed by the business and say family members are being paid too much for their contribution – that their bonuses are way too high, while getting fringe benefits and tax breaks. This, they say, reduces the company’s taxable income and the amount that’s distributed to all family members as dividends.

In many family businesses, there will be employees who assume they will get paid because they’re part of the family, regardless of their contribution. Similarly, there will be others who feel they are being under-compensated for the amount of work they’re putting in. The list goes on.

A KPMG – Family Business Australia survey reveals that one in four family businesses are paying family members more than non-family members for similar work and that six out of 10 family member employees work longer hours than non-family members.

It gets more complicated when you look beyond nominal compensation and salary levels.

For example, some family members might be getting their wages topped up by passive income if they are entitled to dividends from the business that might not be available to non-family members. At the same time, some family members might be on some deferred compensation which would allow them at some future point to increase their equity in the business, or get a slice of the proceeds if the business is sold or floated.

Resolving this is not easy because, strictly speaking, dividends should never be related to the compensation of a family member who works in the business. The size of the dividend is based upon how many shares the family member owns, and how much of the company’s profit the board determines is prudent to distribute to its shareholders. The two can’t be mixed up which makes things more complex.

In all these cases, these matters get out of hand because nobody has set up the structures and processes to deal with the problem in advance. The first and most obvious solution is to set up a family constitution and council (Clearing out messy communication blockages, June 19), that would help work through these issues with everyone and come up with blueprints for their resolution.

As a rule of thumb, wages in a family business should be based on the market rate, in other words, people are paid what they deserve. One way to deal with is to tap into bonus programs or initiate an incentive bonus based upon the family member achieving clear goals. With that approach, salaries could be kept within a market range.

It is also important for family businesses to have some sort of performance management system in place that could drive appropriate market based compensation systems. If they have no human resources managers, they either have to bring in outside consultants or get their own managers up to scratch with undertaking performance appraisals, setting key performance indicators (KPIs), formal job descriptions, not to mention training and other company policies. Having these in place means that any pay issue can be discussed rationally to show why the family member is being paid that rate. It ensures matters don’t become personal – it’s about the business and the model adopted by the family in the constitution. It also makes it clear to them what’s expected.

Some family businesses could look at special projects as a way of compensating some family employees who might not yet be performing but who can be trained to become key players in the business. Projects might include upgrading information technology and establishing innovative sales tracking and customer information systems. By designing these sorts of roles around the individual’s skills, family members could benefit from this opportunity to be involved in the business. It’s a process that can ease them into the business.

However, this sort of approach requires some care. For example, how do you demonstrate that this person is receiving reasonable compensation when compared to other family member employees and non-family employees who are actually helping to keep the business going? It’s a process that needs to be carefully managed. It probably needs input from family members and other stakeholders. The family council could play a key role in implementing this sort of program.

All up, the pay issues need sorting out before they happen. Building appropriate structures of family constitutions and family councils are necessary and by developing these systems and formal policies, the family business would be more professionalised, with fewer chances of conflict over remuneration.

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