A common anecdote told by family business advisors quips that the first three things a second born child learns to say are “Mama”, “Daddy”, and “That’s not fair.”
Tensions and complications related to sibling partnership compensation are grounded in the early-formed, emotional quest for fair treatment between siblings. Like it or not, brothers and sisters compare how much time and resources they receive from parents and grandparents with that of brothers and sisters. This dynamic lasts throughout the sibling relationship – which on average is the longest in life – and must be confronted and managed if we hope to put together a successful compensation system for family members in our businesses.
Earlier this year I analyzed my 70 most recent client engagements and was not surprised at how many of them struggle with the question of siblings and compensation.
- In 60 of the 70 family companies (86%), siblings work together on a frequent basis (at least one day per week).
- Of those 60 family companies, compensation is a major issue in 54 (90%).
- Of the 70 total companies, family member compensation is a significant issue in 58 of them (83%), regardless of whether siblings work together.
Though it may seem simplistic, many of my clients use the Golden Goose analogy to teach children (and adults) about their family business. Protect the Golden Goose from the Sly Fox (primary competitor) and it will lay Golden Eggs for its owner. If the owner gets too fixated on the Golden Eggs and forgets the Sly Fox, he’ll kill the Goose. Dead geese don’t lay eggs, and families miss them when they’re gone.
Compensation in sibling partnerships becomes more straightforward when viewed as an important part of keeping the business healthy for its owners. Owners want their businesses to grow profitably. Profitable growth is a result of excellent decisions made by managers. Owners understand that overpaying under qualified managers, whether family member or stranger, isn’t going to protect the Goose for very long.
Developing a Compensation Policy can help provide clear guidelines for the family to consider when analyzing sibling partnership compensation. Some important elements of compensation policies include:
- The concern that any advantage given to family members working in the business will be seen by employees as family socialism superseding free-market capitalism.
- Family employees will be compensated in the same manner as non-family employees, period.
- Compensation levels will be determined by fair market value analysis.
- Family member performance will be measured consistently and compensation adjustments made accordingly.
- Family employees are expected to live within their financial means and not encumber themselves with excessive debt or rely on special disbursements.
- Extra compensation, when deemed fair and reasonable by the Board and/or Family Council, will be provided through ownership and/or family channels.
As a mechanism for satisfying point number six, consider compensating family employees as owners or future owners. Provide stipends for serving on the Board or Family Council, provide a fair and reasonable dividend taken from profits when the company performs well, pay family members for special ownership-related research projects (e.g. A review of a top competitors strategy) or to serve on an investment committee.