How Much Should You Pay Family Members?

by Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP

Sound policies and practices put business before family ties

Many companies in the oil and propane industry are family-owned businesses. The dynamics of a family business can be very different from those in a non-family corporation. Personal history, differences in personality and emotions that can be dismissed in a corporate setting can take center stage when the company is family owned.

There is no more sensitive topic in a family business than that of compensation. Who gets paid, how much they earn, and who controls the level of compensation are issues that, if left unresolved, can tear a business apart.

Let’s be clear right up front: Family members should receive compensation that is commensurate with their role within the company and their performance. The problem lies in objectively measuring that performance, then having the courage to tie it to compensation.

Blurred Lines

Many people assume that the spouses, children, cousins and in-laws working in a family-owned oil or propane business are paid more than their non-family co-workers, simply because they are part of the family. Unfortunately, this is true in many cases. We’ve seen many instances where the child of the company owner earns an inflated salary that is far out of proportion to his or her contribution to the bottom line of the business.

The opposite can also be the case: Family members may be compensated at a lower level than others in their position at similar, non-family companies. The reasons for this are as varied as the differences between family-owned companies. Some family members “apprentice” at a young age, in an entry-level position, making the rise to an equitable level a slow process. Or the family may choose to keep salaries artificially low to avoid the perception of nepotism.

Neither situation is good for business. But resolving such conflicts and inequalities is tricky. The challenge is that the lines between employee and ownership are often blurred in a family business.

In a corporate setting these issues are resolved by keeping the focus on what is best for the business. This is not an easy route to take in a family business, where personalities and emotions can make impartial decisions difficult. Can a parent give an honest assessment of the work performance of his or her own child? How does a female business owner go into the office on Monday and tell her brother-in-law, who was at the house for dinner on Sunday, that his job performance does not warrant a salary increase this year?

Policy of Fairness

Making sure compensation is fair for both family members and non-family employees requires a laser-like focus on the needs of the business. The owner of a family business must be strong enough to make difficult decisions that are in the best interest of the company, even if it means choosing which member of the family is best suited for appropriate positions, which may command different salaries. The decision is not always easy or clear cut.

Here’s a typical example: Son Joe has never worked in the family oilheat business. Instead, he went to college and earned a degree in business management, then served in leadership positions for several organizations, with a focus on strategic planning. Recently Joe has expressed his desire to finally join the family business, bringing the skills and experience he has developed “outside” to the family table.

Daughter Josephine, on the other hand, has worked in the business since she was a child. Over the years she has learned how to do almost every job in the company: drive a delivery truck, repair a boiler, and install a heating system. Her loyalty to the business is unquestioned.

Which child should run the business? Who should get paid more? Is it possible to escape the inevitable family tension that will result if Joe is brought into the family company? What if cousin Buford needs a job and wants to join the family business, but does not possess the skills or experience required? What is the best decision for the business?

The best solution to overcoming these vexing problems is to establish company policies to provide guidance.

• Have a business plan and vision and make everyone aware of them. This drives the decision making of the company, so decisions are based on logic and reason and not emotions. There must be a clear line between family and business when it comes to making decisions. It is essential that the decisions be made in the best interest of the business, not necessarily the family.
• An outside board of advisors or an independent compensation consultant can play an important role by providing an objective view of the company and its practices. They can bring experience and ideas from other businesses and industries that may be applied to a family business setting, including a sense of appropriate levels of compensation.
• Clearly define positions and roles within the company with job descriptions that outline the responsibilities of the position and the qualifications necessary to fulfill the position. The level of responsibility and required skill set can then dictate the salaries of the various positions.
• With clearly defined positions, roles and skill sets, you can determine which child is best suited for each role and the corresponding salary they should receive. This can also help to determine whether or not there is room in the company for all siblings (and cousins, etc.). Not all will have a skill set needed to make the company successful. Avoid creating “make work” jobs that can drain the company budget and sow dissent among those who are making a difference for the business.

Business First

In the end, clear expectations, open communication and a resolve to put the needs of the business ahead of family politics is the best way forward. Family members who make a meaningful contribution to the growth and success of the company are the key to continuity from generation to generation. They deserve fair compensation for their performance.

Of course, the ultimate decision facing the owner of a family business is choosing who will take over once he or she retires. This must be a long-term process, not just a popularity contest, and should be based its own written plan and timetable. But that is a discussion for another article.

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