Compensation & Corporate Benefits
When you look at the rules relating to compensation for the pirates, they left very little room for questions or conflict. It was crystal clear that the Captain will receive 1.5 times the compensation of the crew. The compensation was clearly stated for all positions or job titles onboard. Furthermore, when the pirates got onboard the ship, they knew exactly what to expect if they worked hard and performed well as well as what to expect if they were hurt “on the job”.
Compensation in Family Businesses
In my experience working with family businesses, this clarity is often lacking. I have often seen family members get paid the same despite the differing roles and responsibilities. One can only imagine the resentment that grows amongst siblings or cousins when they are all paid the same despite some of them playing senior management and leadership roles while others play junior or administrative roles. I have also seen some family businesses pay their active family members based on need. For example, the sibling that had 4 kids but lesser responsibilities was paid more than the sibling with 1 kid who was CEO. These situations create a difficult dynamic and potential issues amongst siblings and cousins, which will only continue to grow over time if not managed. This makes it increasingly difficult for siblings and/or cousins to work, manage, lead, and own together.
As you can see with the pirates, depending on your position onboard you were compensated accordingly. It makes sense that the Captain is paid more than the crew as are the gunner, boatswain and other positions of importance. Family businesses would greatly benefit by doing the same. However, it’s never easy to tell your son, daughter, niece, or nephew who just came out of university and wants a job in the family business that they are not worth the $80,000 they were hoping for. When there are no policies in place for compensation of family members, the individuals receiving less than they are worth will often assume it’s due to personal issues (i.e. mom, dad, aunt, or uncle never liked me much or preferred another) while those receiving more than they are worth will assume it’s due to their self-assessed skill set or simply based on entitlement.
Family Business Rule – Compensation
If all family members were made aware that there are family business rules, one of which deals with compensation for family members, conflict would be minimized or better yet eliminated as least as it relates to compensation. The compensation decision would no longer be a personal one, but would be an objective decision based on the Family Business Rules. Furthermore, there would no longer be any surprises with respect to what family members can expect compensation-wise given it is outlined in the Family Business Rules.
The rule for compensation could include the following clauses:
- Family members will be paid based on Fair Market Value (FMV) meaning the same rate of pay that would be paid to a non-family member to do the same job
- Like other employees, pay increases will be based on performance other than the annual inflationary increase.
- A compensation review will be carried out every 3 – 5 years to re-evaluate FMV
- For executives, the compensation package could include a base salary, a pay for performance component based on a pre-determined formula (i.e., percentage of net income or divisional income) as well as corporate benefits. The distribution of corporate profits should also be clearly outlined as to the participation by the executives.
- What constitutes reasonable business expenses should be outlined in a policy especially for active family members. If not outlined in writing, the abuse of corporate assets can be a major detriment to family relations in the business. This is further addressed below.
- Pay arrangements for “leaves of absence” and sabbaticals for active family members should also be outlined in writing so it is clear to all how these situations are to be handled versus dealing with them on an ad hoc basis.
This means that when a family member is joining the business, he or she should have a clear expectation of the salary or compensation package they can expect. It also means that those that have more responsibilities and more pressure, will receive compensation commensurate to that position. However, compensation is not the only issue. Corporate benefits tend to create as much if not more conflict amongst families in business.
Corporate Benefits in Family Businesses
Corporate benefits can create a lot of issues amongst family members (both active & non-active). Many benefits offered by family businesses to their family members are taken for granted, whether it be a company car, paid lunch every day or the use of company resources for personal use. When these benefits are not properly managed, it creates the perfect situation for conflict and jealousy to arise amongst family members. This jealousy or resentment can also start to permeate the family members that are not active when the benefits seem to greatly surpass what would typically be provided in a business. The non-active family members would like to enjoy the same benefits. Policies or rules relating to corporate benefits for family members must be detailed as an open-ended benefit or unclear rule can cause as much animosity as no rule.
Family Business Example:
I worked with a family business where two siblings (James and Michelle) both worked in management. The policy in this business was that family members in management got a company car. However, the policy was not clear as to what that really meant. Michelle being economical in all decisions chose a mid-sized car, which in her mind met her needs. James on the other hand, with a taste for sporty cars chose a high-end sports vehicle which he couldn’t wait to show his father. Once Michelle started to see the cost associated with her brothers’ choice (new accessories, winter tire storage fees, weekly car cleaning, expensive repairs and maintenance) it started to frustrate her as the cost for her car was a fraction of that. She could use that money to put her kids in private school, travel, plan for retirement, etc. However, just because she didn’t feel the need to waste money on a car, doesn’t mean she didn’t want those funds for something else. This resentment permeated their meetings. Every time James recommended spending money on something Michelle would get upset. She equated his personal fiscal management to his business fiscal management. The point here is the benefit was intended to be equal but the application of the benefit due to its lack of clarity was not equal. One may also wonder if it is fiscally responsible for a business to pay for excessive costs related to the kind of car James chose. James’ choice may have been very different had the policy for the car benefit been for a certain amount every year (say $7,000) and anything above that has to be paid personally. The resentment created by this issue between the siblings is gone and Michelle has no grounds to second guess her brother’s business fiscal management decisions. Clearly, clarity is the answer to an effective corporate benefit policy.
Family Business Rules – Corporate Benefits
All family members have differing expectations, spending habits, and preferences. Therefore, many family businesses endorse the concept of the benefit block. The benefit block is an amount that is allocated to each family member in management. They can do whatever they want with it. They can put it in their Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), use it to put their kids in school, to travel or to put towards their car. This means instead of mandating Michelle to get a car, she would have been able to use that benefit on something that is important to her. This means you will also have a more satisfied management team as they get to choose what they want to spend that benefit on, but they also know the benefit is the same for everyone. The benefit block amount needs to be predetermined and reviewed every 3 years or so. For instance, the benefit block could be for $10,000/year and whatever you don’t use by the end of the year can either be paid to you in full or carried forward to the next year. Family businesses can consider having a benefit block for family employees, family managers, and family owners with the amount getting higher as the family member moves up the ranks.
The important lesson we get from the pirates is clarity. All pirates on board knew what they would be compensated (1 share for the majority of them), what they would receive for good performance, as well as what benefit they would receive if they were hurt on the job. Typically, all family members joining the family business have very different expectations with respect to all of these items. We need to get the whole family onboard with their Family Business Rules to remove conflict and be able to focus on the business – just like the pirates!
Stay tuned for Lesson 3 – Exit Strategies! I am not saying you’re going to maroon your family members on an island (although sometimes an appealing thought), but the idea of the terms and conditions of the exit being predetermined is key to success and informed decision-making.
Please click on the links below to access the previous articles in the series.