Compensation in a Family Business

Shawnee Love   •   February 22, 2019

In a recent blog post, we discussed family at work and the six measures which enable family to work together effectively (for their own relationships as well as the health of the business).

We follow this up with a discussion on pay because how to pay family members is often a source of confusion in family businesses.

In this area, my best advice is:

Pay family members for the jobs they do just the same as you would any employee.

This advice is counter intuitive because family often expects to be treated differently.  However, it is important to separate the family from the business when determining pay rates. That is, ignore the fact that someone is family and pay him or her what the job and s/he as a candidate is worth doing that job. To do that, you need to understand what the job is worth, and then what your family member is “worth” doing that job.

Determining what the job is worth takes the following:

  1. Job Description:  It is critical to know what the job entails. What is the point of the job? What is required to be successful in the role?  This information is the basis upon which you determine what the right pay range is.
  2. A Philosophy: Knowing what type of “payer” you want your company to be is where to start.  Are you interested in being top of market, middle or on the low end (presumably with other perks and benefits to make up the difference)? This will help you understand where to peg your pay once you complete the next step.
  3. Market Pay:  Understanding the range for what a competent individual in the position would make in your industry and area is a key piece of information to consider when determining the right pay package for your job.  It isn’t necessarily what you will pay, but you need to be able to show how your pay (and other benefits and perks) enables you to be competitive.

Establishing pay ranges for jobs based on current market data and your pay philosophy for all jobs enables you to ensure consistency in your pay practices (and avoid some of the issues which arise when pay is dealt with ad hoc [more on this topic in a future blog]).

  • A Philosophy

  • Job Description

  • Market Pay

Determining what your family member is worth is the next step of the process.

This requires you to understand what your family member brings to the table.  If s/he is a very practiced individual with plenty of job related experience who is committed to working hard and exceeding your expectations, then paying a rate that is in the high end of the range might be appropriate.

If s/he is new and inexperienced and will require lots of hand-holding to become effective, then a lower rate of pay is a better fit.

Whatever you do, don’t get caught in the trap of Junior’s expectations.  Whatever Junior thinks s/he is worth, s/he is likely wrong.   Even if s/he is right, Junior needs to earn his or her stripes before everyone else in the company will feel Junior is worth whatever you are paying, so its starter to start low.  Fortunately, family members have a vested interest in putting up with crap, so you can pay them on the low end of competitive for awhile until they prove themselves as worthy of more, without the usual issues that come from lowball pay (e.g., turnover and demotivation).

Bottom line: Ensure your family member earns his or her wage, or those who did earn their wages will get their noses out of joint.

“Determine what is fair for the position and the person.”

In general, people want to be paid fairly for the work they do whether they are family or not.  As such, to determine what a job is worth, you first have to establish what is fair:

  • Externally (the market rate) and
  • Internally (in comparison with other people in the role, as well as other jobs in the organization).

Family members are no different although sometimes entitlement and expectations get in the way. A compensation plan, well researched job pay ranges, and clear process for growing one’s compensation set the path for realistic expectations and also provide clarity for all employees.

If you are struggling with how to compensation family members in your business, we are just a call or email away.