Compensation for Family Isn’t Always Fair

Compensation for Family Isn’t Always Fair

by John L. Ward, Ph.D.
Co-Founder and Principle of the Family Business Consulting Group

Next-generation successors in family businesses are wise not to be too concerned about justice in compensation — because they’re likely not to be paid what they’re worth.

Assume that one sibling becomes CEO and has another sibling in management and two others who are co-owners but not employed by the business. The CEO will be and should be shortchanged in two respects.

First, CEOs of most businesses, especially public companies, receive generous stock options that generate wealth for the CEO if the business’ value grows. Family-member CEOs usually don’t have that privilege. They already own or will own stock, most likely in equal shares with their siblings.Their parents carefully set up ownership that way.Stock options, even if technically feasible (and they are very difficult to construct in a private company), create unhealthy equity differences.

Without the availability of stock options, perhaps cash bonuses can be provided. But an unfortunate difficulty still exists. What is the CEO to do with the cash? He or she doesn’t have the time, hopefully, to be an expert at managing both personal investments and the family’s company. What the CEO is best at is managing the family’s firm — which is unavailable for further individual investment.

Of course, the CEO can invest the cash bonuses in side business opportunities thatpop up in the regular conduct of business. But we don’t recommend that the CEO invest in those without being joined by the rest of the family. Taking personal advantage of such situations can lead to concerns over conflict of interest–a horrible problem when it exits in a family business.

So the CEO has two choices left.Spend the money or turn it over to an investment manager and accept modest returns — more modest than others could realize if they could invest in the business they are running or in private venture opportunities.

That’s one unfair reality of compensation for the sibling CEO of a family business. There is another. As CEO, he or she carries an extra heavy responsibility to look after the family’s ownership and reputation. CEOs of non-family firms are not responsible for the economic welfare of all those who love them and of decades of past and future family reputation. The consequences of failure are more harsh for the family member CEO of a family company than for a non-family firm or for a non-family CEO. And, it’s impossible to compensate for that responsibility. Compensation consultants neither understand nor value it. Even if they did, the amount of extra compensation deserved, beyond that of other CEOs, would likely offend the sensitivities of other family members or company executives. The wise and modest sibling CEO justaccepts less than the job of an owner representative-CEO is worth.

There are but two consolations. The family members may recognize the injustice and show appreciation in other ways.More importantly, the intrinsic rewards of the CEO job have special value in many other ways for the leader.Recognition, accomplishment, service, family and business leadership, extending the family’s legacy, having vision and having the chance to see it through, and other rewards must serve, because financial compensation opportunity is almost always lower than what would be expected in a non-family corporate environment.

This article appears with permission from Family Enterprise Publishers.