Cutting Back

When you have to cut a family member's salary
Magazine Contributor
4 min read

This story appears in the February 1997 issue of Business Start-Ups magazine. Subscribe »

When my brother and I started the business over 20 years ago, our two cousins, who are like brothers to us, joined us as producers," says the owner of a New York City insurance brokerage. "They had a salary, commission and benefits package that was substantially higher than others in the office."

But the insurance business changed dramatically in the past 10 years, and the principals began considering cutting their cousins' compensation packages, which were way above industry standards. "We procrastinated," says one owner, "because we knew this would be very difficult. But if we didn't make the move, we'd lose considerable money."

Eliminating the cousins' salary and cutting their commissions was indeed difficult. "They were aware times were hard, but they thought the work they were doing made up for their salaries. They felt angry and betrayed. In one fell swoop, we went from being a close-knit family to one that was distant and cold," the entrepreneur recalls ruefully.

Unusual? Not at all. When business is bad and a company has to cut back on expense accounts, bonuses, salaries, commissions or benefits, often the one most affected emotionally are the family members who are out of the information loop. They, even more than other employees, feel they should have inside information on the state of the business.

These people go through a grieving process that's perfectly normal, says Bernard Kliska, a psychologist and family business consultant in Chicago. "You can expect them to be upset, go through periods of denial ("I can't believe this is happening"), anger ("I'm going to quit"), bargaining ("I'll stay if we can restructure the cuts"), depression, and finally acceptance," says Kliska. These stages take almost a year to work through, he adds, assuming a person doesn't get stuck in any one stage.

It's hard to convince someone whose compensation you've just cut that the decision is nothing personal. In fact, cautions Jane Hilburt-Davis, family business and management consultant and executive director of The Cambridge Center for Creative Enterprise in Massachusetts, the family business owner has to be certain that this is indeed about money and not a way of getting back at the relative for an unresolved issue in their past.

Repairing The Damage

The head of the insurance agency who dealt with the ire of his cousins took the initiative in repairing the relationship. "I made sure we visited during the holidays and asked them over for dinner frequently," he says. Today, four years later, the cousins are still with the firm--and the entrepreneur realizes he could have handled the situation differently.

"We should have brought my cousins into the process earlier and gotten their input before we made any decisions," says one owner. "If they had felt they were part of the solution--not just part of the problem--they might have had a better reaction."

Hilburt-Davis recommends you and the relative come to a joint decision on how (and how much) of the situation you want to explain to the extended family. Don't be surprised, though, if immediate family members take sides and reflect the emotions of their "injured" kin.

Must It Come To This?

Business downturns happen. Family businesses are not immune to them. Still, the emotional impact of compensation cuts on family relationships can be muted somewhat if standard business practices are followed from the start. Kliska and Hilburt-Davis offer these suggestions:

  • There should be ongoing, open communication about industry trends and the state of the business.

  • Set up a performance review and appraisal system for all employees, including family members.

  • Compensation should be tied to performance and in line with industry standards. "It's not an extension of allowance and not based on how much a person needs," says Kliska.

  • Use an outside board of directors to review compensation practices. "That mitigates resentment," Kliska says.

If all these business practices are in place, when there's a downturn, family members whose compensation has been cut should be able to understand the situation. If they can't, "it might be better to suggest they go elsewhere," says Hilburt-Davis. To further convey that this is nothing personal, ask them if you can help with any planning or additional training they might need to make a move.

Patricia Schiff Estess publishes the newsletter Working Families and is the author of two new books, Managing Alternative Work Arrangements (Crisp Publications) and Money Advice for Your Successful Remarriage (Betterway Press).

Contact Sources

The Cambridge Center for Creative Enterprise, 124 Mount Auburn St., #200 N., Cambridge, MA 02138, (800) 531-5755, (617) 574-5700;

Bernard Kliska, c/o Family Business Consulting Group Inc., 680 N. Lake Shore Dr., #1418, Chicago, IL 60611, (312) 988-9328.

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