Cheap Equal Pay has Unintended Consequences

By Prof. Enrique Soriano

 

In my experience working for family firms in Asia, compensation is ranked among the top three complicated issues that generally plague family-run businesses. The other two are generational transition (failed succession due to a founder’s refusal to share and hand power to the next generation) and sibling rivalry (entitlement and unclear roles). Acknowledging that changes in the compensation structure must be initiated to cure some form of injustice is one way of managing a future contentious issue related to pay. And the business leader (usually the parent) is to be blamed when he or she fails to articulate clearly and unequivocally the rationale of the pay structure.

Let me continue the case I wrote last week related to a business owner whose main business is located in Vietnam. The founder, Nguyen (not his real name), found himself grappling for solutions to a lingering issue related to the pay structure of his children. During our first telephone conversation, he expressed frustration, “I found out too late that the conflict among my children, especially between my two sons, started early in their careers. My eldest son, Tran (COO), felt that he should have a higher salary because he joined the company ahead of everybody, made sacrifices, and followed our desires (as parents) to help in the family business. In short, Tran boasted seniority. On the other hand, my other son, Van (head of sales), felt that they should have equal pay because he was also putting in as much work even if he was spending less time in the office. He also bragged about his MBA degree that he completed at a university in Australia.” The father added in utter disbelief, “ I really do not understand why my children are fighting over a petty issue like salary. This business will be transferred to them someday!”

 

Fair is not equal, and equal is never fair 

This particular sibling conflict is not petty at all. As a matter of fact, due to the years of neglect and inaction by the founder, it has revolved around the question of fairness and equality. Let us focus our attention on why this conflict suddenly became a major issue. After a series of conversations with the family and the sibling protagonists, the issue centered on undercompensating family members. The eldest son, Tran, joined the family business early. He started doing part-time work mostly addressing collection issues until he transitioned to full-time work. At that time, the business was small, and like most small or startup firms, it was often skewed towards lower pay rates. Tran’s dad Nguyen was wary of his son becoming entitled and being treated favorably, so he deliberately lowered his pay to set an example for other employees. As a business owner, he also made sure that he kept the operating expenses within acceptable levels as Vietnam’s economy then was still sluggish. Finally, in anticipation that his other offspring, Van, will join the business, it was prudent for him to keep family compensation lower to prevent it from becoming a financial issue. However, armed with an MBA degree, Van entered the business with high salary expectations. Nguyen could not possibly distort the salary bracket nor was he willing to allow Van to take home a higher salary than his older brother.

As a compromise, the father simplified the pay rate by equalizing the salaries of the siblings. This informal and confusing pay policy became a source of heated discussion during meetings, and Nguyen went on to commit another blunder when he offered a financial carrot through incentives meant to buy peace among warring and entitled family members. Unfortunately, as anyone would have predicted, it backfired!

In many family businesses that I have dealt with, the reality is that emotions and convoluted family relationships can get in the way of addressing these matters. Unless the family trains its lenses on the real issue which is to correct the compensation structure, the prevailing sentiment of the siblings will eventually escalate into prolonged and personalized levels of discord bordering into serious disputes. Business owners must guard against this form of sibling conflict where parties tend to find things to disagree about.