Family Compensation - Family Values vs. Market Value
The issue of family compensation in a family business is often a controversial one. Should the system be based on "family values" where all family members are paid equally, regardless of position; or on a market value system, in which a fair wage is based on education, responsibilities and performance?
Many issues must be considered. The challenge is adopting a strategy that is deemed fair to family members and most profitable for the business.
Issues Related to the Family Business Compensation System
Feelings of entitlement, family employees, as well as parent managers, may be of the belief that family members should make more than non-family members; they are entitled through family ties.
Productivity - when salaries are not based on performance, do all family members truly perform to the best of their ability? Some argue that equal pay can remove incentives for personal achievement. The same can be said for non-family members whose work ethic and accomplishments can never be equally rewarded in relation to family members.
Some business families who employ a market-indexed system offer additional compensation periodically. This family bonus can also provide an income tax advantage or reduce estate tax liability.
In deciding upon or reviewing the family compensation system, it is prudent to enlist the assistance of a family business consultant or trusted advisor. How do you fairly evaluate and compare the skills of family members who are also employees? Or do you simply pay all members the same amount to avoid impending problems? The issue of money is a very sensitive one and an educated, objective opinion may prove invaluable in the decision-making process.
The Alberta Business Family Institute understands the complexities of family compensation and offers resources and coaching that can help you make the best choice for your family and your business. Explore other pages on this website or contact us today.