One of the greatest struggles of operating a family business is separating the family from the business. There are many benefits to having family in the business and to being a family member in a family business, but the most difficult problems result when family values interfere with business values. There is no greater source for family business problems than the compensation system.
A number of family businesses have compensation systems that evolved over time or were developed or imposed by previous generations. Such systems may cause open hostilities. Although it isn’t easy to put aside the anxiety caused by developing a fair compensation plan, it’s absolutely necessary if the family business is to thrive.
Talent management, leadership development and compensation should be built around achieving the results that matter to the organization’s success. The most successful family businesses recognize that employees who earn a reputation for being just like a member of the family are truly valuable when they are contributing to the execution of the company’s strategy and results.
How can family-controlled companies better capitalize on these competitive advantages while addressing common pay challenges?
- Create/refine the executive pay governance structure: Family companies should create a governance process aligned with a board structure and culture. It isn’t necessary to mirror a public company, but many best practices are worthy of mimicking. These include defining the committee’s role, establishing a detailed calendar of activities, and monitoring market practices, trends, plan design considerations and technical issues.
- Understand company pay programs and market practices: In order to compare current programs to market, executive leadership and the compensation committee should know their own programs to make informed and rational pay decisions. This foundation then facilitates the review of current market practices — of comparable private and public companies. The committee should recognize how the company’s practices differ from the market.
- Create a total compensation strategy: Family companies should develop a total compensation strategy based upon the structure of their company programs. It shouldn’t be 100 percent tied to the market. Market practices should influence certain decisions, but they can never be the sole driver. A total compensation strategy clearly articulates the company’s values on pay positioning, benefit levels and prioritization.
- Monitor performance: Create an objective performance evaluation system. This must be done in a consistent, rational manner, without regard to family status. The compensation committee must dictate the structure and create the necessary discipline.
- Communicate compensation programs: Family-controlled companies must clearly articulate their pay plans, to highlight all the elements and be clear on their intent and positioning. Executives must fully comprehend the package, including the structure of incentive plans.
Executive compensation can be a challenging issue in the family business. However, just as the business evolves to thrive, the executive compensation system must stay in step. A structured process and plan enables family businesses to execute executive compensation in an effective manner, while being both competitive and cost-effective.
Elliot N. Dinkin is President and CEO of Cowden Associates Inc. Elliot’s strategic approach assists clients in the development of a total compensation benefit package that controls costs, adds efficiencies and enables the employer to attract, retain, motivate and keep employees engaged while meeting company objectives. Through his guidance, employers become more competitive by creating total compensation packages verses viewing benefits in silos.