Sharing The Wealth

This story appears in the October 1998 issue of Entrepreneur. Subscribe »

Nailing down salary amounts for employees is no simple task for any business owner--but for family business owners determining pay for relatives, it can be especially difficult.

"That's because crafting an appropriate compensation package [for] a relative is an art. Emotion gets mixed into the numbers," says Linda Wood, senior consultant in the human resources branch of public accounting firm Tofias, Fleishman, Shapiro & Co. in Cambridge, Massachusetts.

At different times and stages, business owners may use any of the following rationales when deciding on salaries for relatives:

*Family members shouldn't get paid what they would if they had the same job in another company because they own or will own a significant portion of this business and that should be considered part of their compensation.

Compensation involves more than just salary, so there's some validity to keeping base salaries low for family members who are also owners when the business is involved in maneuvering a turnaround. Down the road, if the turnaround is successful, these owners will be compensated handsomely.

"You have to pay a certain amount to [nonfamily] employees just to keep them, and you have to be competitive salarywise if you want to attract top management talent from outside the family," says Wood. "So when things are tight, the family may have to take a cut."

Families should be leery about instituting a policy that keeps family members underpaid forever, however. "Keeping family members' salaries low when there is no reason for it will eventually create problems," says Wood.

• It's my company, and if I want to pay my son, daughter or cousins more than they would get if they went elsewhere, that's my business. Anyway, they work harder than anyone else, and I want them to hang around to perpetuate the business.

"Any business owner who thinks he or she can keep the salaries of family members a secret from other employees is dreaming," says Wood. So if you're paying your family member more than others in the same or similar positions, you'd better be sure he or she is doing an outstanding job.

"People will understand when a family member gets paid more than they do if the business is doing well and if the family member is doing an effective job," says Wood. "Even more important, [nonfamily] employees must feel they're being compensated well and being appreciated for what they do."

Sometimes, too, you have to pay a family member more because his or her talent is top-notch, and you need to lure the person back to the family business from another company where he or she is being well-compensated. That's what you'd have to do if you wanted to attract any top executive.

• I pay all my children the same salary. They all make significant contributions and play important roles in the success of the business. Besides, I wouldn't want anyone to feel slighted.

It doesn't make sense to pay everyone the same amount just to keep the peace. Don't be fooled--equality doesn't ensure peace. In fact, it might have the opposite effect. It might engender resentment among those family members who are making the largest contribution to the business' success.

This approach does make sense, however, when the family members work well as a team and each person's contribution is essential in making the entire operation run smoothly. For Roger Tofte, 68, founder of Enchanted Forest, an amusement park in Turner, Oregon, this arrangement works well. Three of his four children are in the business and have their own areas of responsibility as managers. Mary, 37, is the business manager. Ken, 40, is head of the 12-person maintenance crew, and he designs and makes the rides. Susan, 42, is the creative director of the park, directing and creating the music and making the costumes for all the plays. "They're the only managers in the company," says Tofte, "and their salaries are equal because they are all indispensable."

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Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).

Setting The Standard

So what are the criteria for determining reasonable salaries for family members in a family business? Ask yourself the following questions:

• Does the salary reflect the role the person is playing? A family member coming in right out of college may know a lot about computers and may even come into the family business as the MIS manager. "But that doesn't mean he or she should be paid a salary commensurate with a seasoned MIS manager," says Wood. Nor does it mean that the inexperienced MIS manager should make the same salary as his or her brothers or sisters who have been working in the family business for a number of years.

• How does the salary stack up to the salaries for comparable positions in similar organizations? In your assessment, include the type of industry you're in, the size of your company in terms of revenue, the geographical location of your company as opposed to others, and the other companies' general compensation philosophy.

• How well are other employees and managers in your company compensated? When you think compensation, consider base salary, short- and long-term incentives, bonuses, benefits and perks. Compensation for everyone should reflect the company's performance as well as individual contributions and should not be adjusted to accommodate an individual family member's financial needs.

• How well is your business doing? What can you afford to pay? This is an important business question that can't be overlooked.

It's often difficult for the heads of family businesses to take the emotion out of determining salaries when it comes to relatives. That's one area where outside input comes in handy. Consultants or an outside board of advisors can be useful when evaluating family members' salaries and total compensation packages. The objectivity they bring to bear helps maintain positive family relationships.

Contact Sources

Enchanted Forest, (503) 371-4242, http://www.enchantedforest.com

Tofias, Fleishman, Shapiro & Co., (617) 761-0600, http://www.tfsandco.com