Compensating Family Members – The Most Sensitive of Subjects

Honestly, are you truly worth what you are getting paid?

Family member compensation is a sensitive subject and can spark up conflict quicker than almost any other single issue in a family business. Family members tend to either be undercompensated or overcompensated, rarely are they in-line with the pay scale for their position in the outside market. Family businesses carry a stigma and false perception of over paying their family members. I have found it more often is the opposite and the majority of family members are compensated below the market salary for their position. How does this happen?

 

Our Experience

Initially our family members were “under-compensated” in the family business.

In our business, the younger generation started in entry-level positions and worked their way up. Our family was very sensitive to the pay rates for family members. We were paid at similar or slightly below the rates of other non-family employees.

In a family business it’s often difficult to perform job performance reviews. It’s challenging enough to do performance reviews for non-family members on a consistent basis. When parents review their children it can be awkward and this often causes the reviews to be done inconsistently. In most companies pay increases are done at the same time as the performance review. If the performance reviews don’t take place the wage increases don’t occur. Some family members may miss several pay increases causing them to gradually fall below the rate of the other employees. It is equally awkward for a family member to approach their parents about wage and performance review concerns.

As our business grew and we began hiring non-family executives in management, we had to make our compensation plan more competitive to attract outside talent. We implemented a performance bonus program and conducted salary surveys.  It wasn’t until this program was put in place that we realized the pay discrepancies with the family members. When we implemented the program we did some catch-up pay increases to bring the family more in-line with the salary surveys.

 

10 Reasons that lead to “under-compensation” for family members:

  1. Often hired at an early age on a part-time basis
  2. Smaller firms often are skewed towards lower pay rates
  3. Want to set an example for other employees
  4. Wary of family business entitlement issues
  5. Founders at business startup received lower compensation
  6. Avoid perception of family members treated more favorably
  7. Awkwardness of performing family member performance reviews
  8. Often assumed family will take lower compensation than outside of the company
  9. Lower experience level and learning on the job drives rates lower
  10. High number of family entering business can force firm to keep family compensation lower to prevent it from becoming a financial issue

Family businesses try so hard to prevent the perception of favoritism and special treatment to family members that it often is done at the detriment to the younger generation. This is a good example to set, but try to manage family members at least as fair as non-family employees to prevent resentment and other issues from creeping in.