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When Employees Aren't Part of the 'Family' in Family Business

May 11, 2013
URL: http://www.entrepreneur.com/article/226573

In the world of small businesses, "family-owned" usually means "family-run." But it's not unusual to have a non-family employee or two who's vital to your company's success. Finding the right way to reward those employees, and maintain their loyalty, can be challenging. It can also be critically important, and if you don't believe that's true, imagine running your business next week without them.

"In today's competitive market, family-owned businesses have to be mindful of how non-family talent can benefit their business," says consultant Mary Hladio, president of Ember Carriers Leadership Group in Cincinnati, Ohio. "Businesses need to be prepared to offer fair compensation, competitive benefits, a growth track and perhaps some nontraditional benefits."

Letting go of keeping the business all in the family
In some cases, that may mean giving the non-family employee an ownership stake in the company -- especially if you hope to sell the business to someone else at a later date or bring in additional equity investors as a means of raising capital.

Under those circumstances, says investment banker Chuck Miller, managing partner of Carlton House Capital Partners LLC, "the value of any company revolves around the perceived strength and stability of the management team. If non-family employees occupy senior management positions, it is imperative that they are tied to the company with either actual equity or options to obtain equity."

Of course, some families have no interest in selling to outsiders, or including non-family employees in the ownership group. In that case, rewarding non-family employees can call for some creativity. The right approach can vary from one situation to the next.

Creating unique compensation plans for non-family employees
"Every non-family employee has different goals, so any plan to adequately compensate them must be tailored," explains attorney Peter Bloom of The Bloom Group in Washington, D.C.

It also must be realistic. If your key employee's goals are primarily monetary, for example, you could simply shower him or her with an over-the-top salary. That could backfire, though, if your business hits tough times.

A better idea, says Bloom, might be to reward that person with "phantom" stock. Phantom stock doesn't convey ownership, but it can entitle the employee to profit-sharing arrangements or to cash out their shares at some later date. Amounts paid under such circumstances are treated as ordinary income for tax purposes -- a drawback compared to real stock, which can qualify for favorable capital gains tax rates -- but Bloom notes that you can always pay your employee an additional "gross-up" bonus to cover the tax hit. Either way, consult tax and legal counsel before establishing a phantom stock plan.

If phantom stock sounds too complicated, you could simply offer a straightforward bonus plan. Andrew Wang, senior vice president of Runnymede Capital Management Inc., an investment management firm in Mendham, New Jersey, says his company offers non-family employees a profit-sharing plan and annual bonuses, which it believes aligns their interests with those of the firm. "We are proud to boast that our key non-family employees have been with us since the inception of our company 20 years ago," he reports.

In some cases, of course, key employees may be interested in more than cash -- a vote on major business decisions, for example, or access to information about the company's finances. "We often encounter circumstances where an employee's goals and interests go beyond the financial," says Bloom. To accommodate them, he says, family-owned businesses can offer those employees governance and information rights, including, if desired, the same information they would be entitled to as an equity holder.

Making employees feel like part of the family
Ebon Glenn, vice president and co-owner of RDG Concessions, which operates several luggage and apparel shops at San Francisco International Airport, says his family-owned business seeks to attract and retain senior employees by involving them in operational decisions and by treating them as if they were family. In one case, he recalls, his parents helped a new manager find an apartment and gave him a car. Another manager is invited to sit in on negotiations with the company's top vendors and also participates in decisions about the packaging, inspection and shipment of merchandise, even though his primary responsibility is accounting.

Such accommodations can be helpful in keeping employees energized. "Family-owned businesses have to work at engaging employees through open communication and investing in their future," says Hladio.

Other ways to reward and retain key non-family employees, says attorney Senen Garcia of the SG Law Group in Coconut Grove, Florida, can include offering fringe benefits that create a high barrier to exit, such as retirement plans and health and dental insurance, or bonuses tied to your company's achievement of predetermined milestones. If your company gets involved in an independent project separate from the main business, you also could offer a key employee a partial ownership position in that venture.

If you're not sure you're doing enough to keep your key employees happy, start thinking now about doing things differently. And if you need some incentive, just imagine what it would be like to show up at work tomorrow and discover that they are no longer on your team.