Compensating Your Children the Right Way Part 2

By Prof. Enrique Soriano

 

Family-owned businesses are extremely complicated. It is no surprise that many active family members are struggling to find the right balance. As family business advisors, when we are tasked to prepare compensation and benefits policies for next generation leaders, we are always confronted by family members emphatically expressing that “work” and “life” have been conjoined since birth, that they have been pre-programmed to embrace this set up years before they officially joined the business and that ownership and management is one and the same. This dilemma can be very stressful more so when there are no rules of engagement when they start working. But it does not end there, the hard part is compensating family members fairly and any discussion related to pay can spark conflict in an instant. Therefore, I would like to direct this question to the founders and business leaders, “Are you compensating your children the right way?”

 

Tendency to Underpay

Let me start with the most pervasive practice within the family business ecosystem: Business leaders especially founders have the tendency to deliberately underpay family members under the pretext that it will motivate them to work harder and to help them understand what it means to be frugal. Regardless whether it is in Asia or other parts of the world, it is clear that there are many parents who undercompensate their children in order to convey a powerful life lesson or control their lifestyle. Even if the objective is to purely ingrain values like hard work, modesty and frugality, underpaying and equalizing the children’s compensation are dangerous practices that must be discontinued. Though noble, this conservative parent/founder/owner mindset has its downsides. The hardworking members sense this practice as unfair when they see other siblings not putting in their efforts. Additionally, they hear their friends share their freedom away from their parents and happily receiving market based compensation. Aggravating this evidently unjust pay is the lack of family employment rules under an undefined and informal workplace structure. This confusion can put a heavy strain on family relationships and when left unresolved can continue long after the parents are no longer around.

David Harland, co-founder of FINH, cited the demoralizing effects of undercompensating children…“the problem of money is complex since it can be tied up with issues of fairness, approval and even guilt. As the children count the long years for low wages working for the family enterprise, they also see opportunities outside the family business pass them by. Low salaries can also leave family members too dependent on the family for their livelihood and this eventually builds resentment.” As the children grow their family, household expenses multiply and the feeling of injustice transforms into some kind of grievance and when ignored morphs into hostility. There are many possible issues that can happen under this unsettling environment:

a. The hardworking family members are demotivated and their appetite for working long hours slowly erodes.

“Why work hard when I am receiving the same pay as my lazy siblings”

b. If they have not done it yet, we should anticipate family members considering additional sources of income outside the family business

c. They will either set up their own businesses with their spouses and or friends. As the start-up business gains traction, you can expect the adult child to spend more time pursuing his or her business and devote less time in the family business

d. Conflict of time: The time allocated by the adult child for the personal business steadily builds up. At the onset, it usually starts with email exchanges, telcons, virtual meetings, extended lunch breaks, less working hours on a Saturday and before you know it, there are days that the family member is no longer reporting for work in the office.

e. Conflict of interest: Using the resources of the family business (employees, vehicles, office supplies, etc.) for personal gain can create confusion among employees and can destabilize relationships among family members

f. At worst, the family member puts up a business that directly competes with the family enterprise

Any founder or business leader ignoring these tell tale signs and tolerating this volatile arrangement will, without a doubt, inflame existing family tensions. And the lack of a proper venue or forum to resolve these sensitive issues openly (through governance and pre agreed rules) can negatively affect family harmony.

To be continued…