Attracting Non-Family Employees

It's true. Some high-powered managers love working for family-owned firms--especially when there's less bureaucracy and a warmer and more appreciative environment than in large, publicly held, management-run corporations. But don't count on the "family effect" to be the only attraction. Rightfully, family businesses also have to show them the money.

The first way of doing that if you want to motivate and retain a key manager is to pay the market rate for the position. The analysis must go beyond a nationwide industrial standard. "You have to look into what firms in your area are paying," insists Ernesto Poza, director of The Family Business Program, located at Case Western Reserve University in Cleveland. "You'd pay more for a CFO in New York, for example, than you would in Cleveland."

While family firms can't compete with public companies vis-à-vis stock options, they often have the flexibility to develop creative, meaningful and competitive compensation packages. Look at what today's executives want.

Let's start with being appreciated and rewarded for excellence. In that regard, performance bonuses can be real incentives for nonfamily managers. It's important when dealing with performance bonuses that everyone understands and agrees to the goals, the measurement of those goals, and what employees receive upon reaching them, says Joseph H. Parent, managing partner of the Boston CPA firm Parent, McLaughlin & Nangle.

Managers are also concerned about the quality and costs of health care. Belonging to plans that meet the needs of the nonfamily managers and their families is a big draw. So, of course, is low employee contributions for medical insurance.

A key nonfamily manager may question whether he or she will ever have the opportunity to lead the company or one of its divisions. What can you offer? You may need a bridge president to take over the company after you retire until the upcoming generation is ready to run it. Or the successive generation may not be interested in running the family business at all.

That's the situation confronting Eric J. Lindberg, founder and CEO of Atlanta-based global recruiting firm Management Search Inc. International. His brother is the administrative vice president of the company. His son used to work for the firm and his nephew still does.

But Lindberg isn't certain what the future holds or whether a family member will run the business when he retires, which he has no plans to do now. "Any company that's going to grow must groom for future management," he says.

One way he guarantees nonfamily managers the opportunity to reach their full potential is through a three-day in-house training program, which everyone must attend before being promoted.

Recognition and continued exposure to new ideas and techniques, such as representing the firm at conferences, being singled out for elite training, or joining family members on a planning retreat, add to the nonfamily executive's stature and increase the contributions he or she can make to the company.

For many people, lifestyle issues loom in importance. Executives with families or other personal responsibilities might negotiate for flexible workweeks, longer vacation allocations, or even vacation time accruing from the first month of employment rather than after the first year. They might even be offered the use of the family's vacation home.

And don't forget about a solid retirement plan. Age and outlook influence how much weight a manager will give a retirement plan, but just about everyone expects something, such as a 401(k).

"Additionally, family businesses often like to use nonqualified deferred compensation plans, because through them, you can provide additional benefits on a discretionary basis to selected key employees without being encumbered with ERISA [Employment Retirement Income Security Act] regulations," says Parent. Deferral plans appeal to employees who do not need additional, currently taxable income now.

The problem with these plans from the employee's point of view is that without specifically allocated funds, they're risky. So to ease a nonfamily manager's concerns about agreeing to a future benefit that he or she might never see, Parent says many companies establish Rabbi trusts. Under these irrevocable trusts, the firm sets aside funds to be used exclusively for retiree benefits.

Phantom stock can also provide the nonfamily manager with additional future security. Phantom stock is exactly what the name implies, except no stock is transferred. The participant is granted "appreciation rights" to a specified number of shares. The appreciation (which the stock holder has a vested interest in making happen) may be defined by a change in book value or by another measure of growth. The rights are paid generally on retirement, termination, disability or death.

With such a potpourri of financial incentives (linked to a market rate salary, of course) available to family businesses today, there's no reason why your attorney or accountant can't advise you on ways to be competitive with the big, public companies when attracting and retaining top-notch executives.

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).

Contact Sources

Management Search Inc. International, (404) 659-5050, fax: (404) 659-7139

Parent, McLaughlin & Nangle, (617) 426-9440, fax: (617) 423-3955

Weatherhead School of Management, (216) 368-2033, http://weatherhead.cwru.edu/fambusiness