THE Sixth Commandment is “pay must be based on contribution to the business”. Lance Gokongwei said that in order for the family member to live and think independently, the family business must pay the right salary for the right job, but the pay must be adequate enough so that the family member will not be dependent on the parents for support. “The amount you will receive is based on merit and not who you are in the family totem pole,” Lance added.
In the early years of the family business, the struggle is for survival. Management often face pressure to hire relatives or close friends who may lack the talent or skill to make a useful contribution to the business. However, once hired, such people can be difficult to fire.
Another challenge frequently encountered by family businesses involves paying salaries to and dividing the profits among the family members who participate in the firm. To ensure that salaries are distributed fairly among family and non-family employees, business leaders should match them to industry guidelines for each job description. When additional compensation is needed to reward certain employees for their contributions to the company, fringe benefits or equity distributions can be used.
Standards
Without exception, family employees must live up to a higher standard than other employees. Their commitment to the company’s mission and vision goals needs to be an example to others within the organization and inspire confidence among its investors. Similarly, rather than resting on their genetic laurels, family members ought to be the hardest workers in the business.
Additionally, any family member who is employed by the company should gain their position on their own merits. In other words, every employee must be qualified to perform his or her job, regardless of whether or not they are related to the company’s owners. Some companies go a step further and require family employees to work outside of the company for a minimum time period before they can be considered for employment in the business.
Performance
Naturally, family members should be subject to the same performance review standards as other employees. The board of directors may find it useful to designate its own subgroup to conduct these reviews since sensitive, family-related issues may emerge during discussion. This subgroup may also be helpful in ensuring that individuals will not be held responsible for conducting reviews on members of their own family. This is no less true for family members than for non-family members. In my experience, I have seen many cases where family members know that their compensation is completely dependent upon their performance, and I assure you their performance is greatly enhanced. In addition, their security and confidence grows significantly because they realize that they are not “handcuffed” to the family business, i.e. they could move to the outside and obtain the same compensation for the same services.
If good fences make good neighbors, a well-defined set of rules makes a smooth-running family operation. Family operations that fail to define the conditions and expectations required of individual family members quickly find themselves burdened with the dead weight of underachievement and entitlement mentalities. In some cases, problems with family members spill over to the rest of the employees, driving down morale.
Successful family businesses have carefully defined policies for all of their employees. While family members have to abide by the same HR rules as everyone else, they have the added responsibility of adhering to the company’s “family rules” – the policies and procedures regulating family members who are directly involved in the company’s operation.
‘Shirtsleeves to Shirtsleeves in Three Generations …’
One saying about family businesses is universal: “Shirtsleeves to shirtsleeves in three generations” or “Clogs to clogs…” or “Rice paddies to rice paddies…” A successor generation that has enjoyed the benefits of affluence may not be motivated to work as effectively as those who founded the company, unless the benefits they receive are somehow tied to the contributions they make.
Developing clear policies about compensation may be one of the most effective moves you can make to insure the company’s continuing profitability. No matter how much you love each of your sons and daughters, decisions about compensation and ownership need to be made from the perspective of the business: What is best for the continuing success of the business? What will keep the “Golden Goose” healthy, so the whole family can enjoy its benefits?
When your home was full of kids, you perfected the art of cutting the apple pie (a universal sign of love) into exactly even pieces. When they become adults, responsible for their own behavior, the pieces of the pie will no longer be even, because equal isn’t always fair.
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Prof. Soriano is the chairperson of the Marketing Cluster of the Ateneo Graduate School of Business. He is also a Senior Consultant of Wong+Bernstein Business Advisory Group. For comments, send email at [email protected]
