One of the common “hot button” topics in any firm is compensation.  What someone is paid matters, and if it is a member of the family that owns the business, this is especially true since it can have repercussions inside the family as well as in the business.  Complicating things is that talking about money is not usually a strength for many families.

A good approach in general is to “treat the business as a business, and the family as a family, and to try not to get the two confused.” Practically, such a process means that compensation for family members should follow the same guidelines that would be used for non-family members. This helps ensure internal equity across family and non-family employees, reducing sources of conflict and simplifying compensation decisions.

Using market-based compensation for all staff (including family) creates a more standard and defensible approach. This can be particularly helpful in families with some members working inside the business and others who are not. There can often be accusations that family members are getting extraordinary wages for their roles, which in turn may create tensions inside the family as some members feel all are not being treated equitably. This can be particularly tricky when the non-working family members are (or will be) shareholders in the business – leading to conflict about over-payment of company resources to family staff, which impacts the bottom line (and potential dividends to owners).

Overpaying family members (which is more common than under-paying them), also has the unintended result of distorting the financial statements: the Salaries line(s) on the income statement shows higher than what would otherwise be expected expenses for the business. In a sale of the company, a business valuator would “normalize” for this, by stripping out what was an over-payment of company funds for the work done, reducing the value of the company.

Using Market Based Compensation is just one part of a Family Employment Policy, which lays out the terms and conditions for family members working inside the business. The policy helps “make the invisible, visible” which (if communicated to the right family members and workers) can greatly reduce tensions. When such a policy is in place, it also helps family members coming into the business have realistic expectations, and understanding of how compensation is set.

Finally, when thinking about “family” compensation, it is important not to limit the thinking to only bloodline relations. In many small and medium-sized businesses, there are often family members from other (non-owning or related) families working in the business. This can be a very positive aspect of family businesses where “they treat me like family.”  While such a process can offer great upsides in hiring and retaining good staff, the principle of using market-based compensation can help all family members have good expectations, and be paid fairly. In such a case, sharing a Family Employment Policy more broadly can be a positive across the organization.