Family Business Compensation: Too Much, Too Little or Just Right?

How does your company's compensation plan measure up? Setting up a fair pay scale is especially challenging for family business owners who must balance emotional loyalty and business practicality.

One of the most sensitive issues is ensuring equitable pay for both family and nonfamily employees. When not handled thoughtfully, pay disparities can spark resentment, damage morale, and threaten your company culture. 

 Here's some guidance to help you address this challenge while rewarding merit and keeping the peace. 

Beware of Emotional Minefields

Compensation issues in a family business are tricky because they can arise within the family and between family and nonfamily employees. For example, salary inequities among siblings can breed resentment and fighting. But simply paying them all the same salary can also create problems if one sibling contributes more than the others. 

Second, family business owners may feel it's their prerogative to pay family workers more than their nonfamily counterparts, even if they're performing the same job. Although owners naturally have the best interests of their loved ones at heart, they may inadvertently injure morale among essential nonfamily employees and risk losing them. 

Nonfamily workers may tolerate some preferential treatment for family employees, but they're apt to become disgruntled over bigger differences, particularly if they feel that one or more family employees aren't pulling their weight or performing at the same level. 

Tailor Your Approach

There's no one right way of determining "fair" compensation. Every company's situation will be unique in terms of familial ties, financial needs, and goals. First and foremost, you need to think beyond salary when it comes to family workers.

Often, base salaries are intentionally kept low, and the difference is made up with a sizable ownership stake in the business. Because family members are generally in the company for the long haul, they'll receive increasing benefits as the business grows. But be sure that compensation is also adequate to meet the family employees' living needs. 

Incentives are a key motivator for family members. They may include a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward. 

Nonfamily workers, on the other hand, recognize that their opportunities for advancement and ownership are more limited in a family business. So, offering higher salaries to them can be important for attracting and retaining top talent. 

Another way to satisfy key nonfamily employees is to give them significant financial benefits for longevity with the company. You can structure this arrangement in various ways, such as through phantom stock or a selective executive retirement plan (also known as a nonqualified plan).

Add Objectivity to Pay Rates

To balance the subjective aspect of determining compensation, add an element of objectivity to the process. For example, consider applying a market-value-based approach, which entails comparing what other companies in the market are paying for the same position. You can find this information in compensation survey databases, such as Payscale and the Society for Human Resource Management (SHRM), as well as industry-specific salary surveys. 

For many family businesses, this approach will be quite different from how compensation decisions have been made in the past. To smoothly adopt this process, explain the benefits to your employees and gradually ease into the transition — doing so will gain buy-in and support from family and nonfamily workers alike. Consider working with your financial advisor when adjusting your pay scale. An outside specialist can bring fresh, unbiased insights, ease your employees' concerns, and identify cost-saving opportunities. (See "Keeping Payroll Costs in Check" below.)

Another method is to measure performance. If you tie compensation to performance, family employees will be more inclined to work harder, and nonfamily workers will feel their compensation is fairer. This, in turn, will improve morale and promote harmony among family and nonfamily workers. 

Be sure to tie compensation to individual contributions and your company's performance. Also, establish and communicate performance measures and short and long-term goals at the employee and company levels. 

Incorporating market and performance-based approaches can help you separate personal and emotional connections and see compensation in a more objective light, thereby reducing discord among your employees. 

Keeping Payroll Costs in Check

For many family-owned businesses, payroll is the single largest expense. If payroll costs aren't closely monitored and controlled, your company could lose its competitive edge or, in a worst-case scenario, become so unprofitable that you have to sell or close.

When evaluating your payroll, remember it doesn't include just wages, salaries, and bonuses. Other payroll-related costs are:

• Payroll taxes, such as the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and state unemployment taxes
• Paid time off, including vacations, holidays, and sick time
• Retirement plan contributions
• Medical, dental, and vision benefits
• Life and disability insurance coverage
• Wellness benefits, such as reimbursement for health club dues
• Other fringe benefits and perks, such as discounted stock, company vehicles, and corporate discounts

Overtime is another expense that's often difficult to control. One way to cut back is to convert hourly employees to salaried. Obviously, you need to approach this strategy selectively. But if a proven, skilled worker is ready to become a manager, switching him or her from hourly to salaried could save money and simplify payroll administration.

Love, Loyalty, and Payroll

Fair compensation isn't just about numbers — it's about trust, transparency, and respect. By using thoughtful incentive structures, you can reward employees appropriately while preserving family unity and organizational morale. Your accountant or financial advisor can serve as an impartial guide, helping you craft a pay system that reflects your company's values and growth vision without sacrificing harmony along the way. 

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