Family member compensation must be based on performance not blood

By Prof. Enrique Soriano

There is no ‘one-size-fits-all’ solution to a family business with some degree of conflict. A father will be biased toward their firstborn just like a mother will favor one offspring over another. On the other hand, a sister may manifest dislike against another sibling, while in-laws believe their spouses are overworked and underpaid. Conflict is normal in family businesses, but the unresolved ones classified as excessive are clearly creating damage and instability. When the family is not able to deal with it constructively, danger kicks in and opens a prolific source of deep-seated problems, like a pandora’s box.

Embracing conflict as a natural event will ease the burden of trying to avoid it. Of the myriad of conflicts facing family-owning businesses, one of the most pervasive (and very troubling) issues is how to come up with the right compensation package for family members working in the business. It’s not just about the money or the position; much more must be unpacked and factored in. To parents/owners/operators, I want to raise a challenge: When you see some of your children working long hours while others work less or don’t work at all, would you consider it fair to give all of them equal compensation?

A close family I was helping was not exempt from this problem. The conflict between the eldest sister, Rina, 38, and her brother Rey, 34, surfaced when one after the other joined the family business. When the founder asked for my help, I took the position that their salaries should be based on two fundamental criteria: first, the assigned tasks and the titles they were occupying, including their scope of work, and second, their job performance. Rina felt she should have a higher salary because she had been with the company longer, therefore giving her what she believed was a form of seniority. On the other hand, Rey felt that they should have the same salaries and benefits since their divisions complement one another, somehow conveying the message that since he was the male offspring, it was expected that he would be assuming the role of a successor.

As a seasoned executive occupying several CEO positions in the ’90s and early ’00s and currently a member of several family boards in Asia advising RC Coms (Remuneration and Compensation committee), I held on to my point of view by challenging the siblings to defend and justify their salaries on the basis of their job performance. Was the compensation given to them by their father based on their own merit, or was it because their last name was their birthright? Were the additional allowances given to them exclusively because they are direct family members who already have growing families? Do they really deserve what they are receiving? Are they not embarrassed that their compensation package has become a demotivating force and a real dampener for many deserving non-family executives, with some showing signs of disgust and threatening to resign?

The two siblings were stunned. They did not know how to respond to my questions, and even the father — the most guilty of the three — quietly showed discomfort as he shook his head, struggling to find the right answers. I reinforced my questions by asserting that in formulating compensation standards, certain metrics must be factored into the equation. I then reiterated that a specialist must be invited to craft a compensation plan linked to the children’s (and non-family executives’) qualifications and career path.

The best antidote for managing conflict among siblings is to set documented boundaries upon their entry into the family business, institute Rules, Roles, Rights, Responsibilities and Real Accountability, the 5 R’s that shape the W+B governance model, and hold on to the quote “With science, objectivity will always prevail over emotions.”