DOING business with family and friends can be very rewarding. It can also be very complicated and difficult. Anyway, doing business with loved ones has never been a neutral topic. It always involves an even more stringent standard of etiquette than usual, but if appropriate measures and safeguards are taken, it can make life, work and relationships a rich, rewarding tapestry that brings the best of both worlds.
Compensation in a family business, if not handled properly, can become a source of acrimony, both among family members and between family members and nonfamily employees. When handled with finesse, however, compensation can serve as an incentive for all.
Hence, the fourth commandment in the Gokongwei family business is “no work, no pay from the company.”
“The family member must work to receive a salary. There should be no fake pay. You must have a real, full-time position in the company. In my family, we do not receive allowances after graduating from college. If as a parent you want to give your child money from your own salary or dividends, that’s your prerogative. But the family is not going to pay for this,” Lance pointed out.
Some business owners try to avoid friction among children by paying those working in the business equally or giving equal amounts of stock to all children whether they work in the business or not. But the result is not likely to be fair, experts warn. More experienced or harder-working offspring will resent those who aren’t as productive but who are paid the same. And stockholders inside the business will resent siblings outside who share in the appreciation of the company without contributing to its growth.
Here’s a case in point. Five sons of the third generation are working at Maxalea Nurseries Inc., a 40-employee landscape-contracting company owned by brothers Jack and Don McWilliams of Baltimore. The sons are paid according to longevity in the business and the “value of and production of what they put into the business,” says Sue S. McWilliams, Jack’s wife and corporate secretary-treasurer. She points out that the oldest child in the business is 32, and the youngest, who works part time, is 20 and in college. With that spread of ages and experience, she suggests, equal salaries would not be appropriate.
At a recent family-business conference, one business owner recounted how angry his daughter had become over the fact that her older brother earned more than she did. She oversaw manufacturing and was on a flat salary; he managed sales and worked on commission. When sales were especially good, so was his pay. “She feels there’s an inequity,” said the father.
When dealing with children, family-business experts offer one major rule: Remember that fairness and equality are not necessarily the same.
Here are some guidelines for families who are concerned about fairness for both family and nonfamily employees:
Don’t overpay your children. Paying a 15-year-old $5,000 or a 21-year-old $10,000 a month tends to keep a child from developing a work ethic and improving the company. I would recommend, especially at the lower levels, that the children be paid properly for what they’re doing,” says Ross W. Nager, a tax partner in the Houston office of Arthur Andersen & Co., an international accounting and consulting firm.
Among family members, understanding is key. If one child is a manager at $130,000 a year and another works on the loading dock for $60,000, discuss the reasons for the difference, and make sure both children understand them. “It could be a function of age,” says Nager. “The management person has been working there for five years, while the person on the loading dock is fresh out of school. In virtually all cases, the two children would accept that.”
Pay according to value, not according to need. Resist the temptation to pay Paul more than Mary because he has five children and she has none. “That plants too many seeds for discontent,” warns David M. Morris, president of Franklin/Morris Associates, Inc., a Baltimore consulting firm that specializes in insurance and compensation. He recommends that salaries be based on objective criteria so that children understand the value of their own services and so nonfamily members don’t feel that family members are receiving special treatment. For example, if all the other salespeople in the business are on commission, use the same commission structure for family members who are salespeople.
Be alert to the symbolic impact of perks and lifestyles. With nonfamily employees, eliminate the “built-in assumption” that family members are receiving special treatment, Morris says. It helps when the lifestyle of a family member is seen as similar to that of nonfamily members who are at the same stage of development.
Curb problems with good communication. Use the business only for business compensation. If you want to give nice trips or other amenities to children or grandchildren, make them straight family gifts, Morris advises. Don’t pay for them out of the company.