If you run a family business, chances are you are either over- or underpaying yourself and your family employees. Many small business owners do not base their wages on the open market. However, setting compensation for family employees and coworkers isn’t something that should be taken lightly. If your calculation is off or you treat family and non-family employees differently, it could create staffing problems for your business in the future.

Are You Paying Family Employees Fairly?

Many small business owners may assume their family members will work for less out of love or pay lavishly to make up for time away from the family home. Compensation for family employees is often less tied to a fair market wage and more closely connected to the success of the business and the closeness of the family relationship. Nothing says you must pay your family employees the same as they might receive at another company. However, if you don’t pay them fairly, you may find their enthusiasm for the family business waning.

Some family members will be willing to defer hourly or annual compensation in exchange for a promise of an important title or ownership interest in the family business. However, all too often, family business owners assume that this is true without having a clear conversation with the next generation. When your family employees learn what their skills are worth in the open market, you may find yourself without a successor and facing the real possibility of having to sell or close your company in order to retire.

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Compensating Non-Family Coworkers in the Family Business

If you err on the side of paying your family employees well, you may have trouble retaining non-family coworkers. Those employees who aren’t part of the family may feel as though they are carrying more than their fair share of the burden, or are not being compensated fairly compared to members of the family.

Generally speaking, you should apply the same compensation bands or pay structures to everyone in the business, whether they are related to you or not. Family members and non-family members alike should be paid based on their:

  • Position
  • Experience
  • Education
  • Job performance

Opportunities for promotions, raises, and other advancement should be offered universally, with protections in place to avoid promoting a family member above their skillset. Non-family coworkers should have the same access to employee benefits and annual benefits. That way your entire team will be able to pull together to work for the success of your family business.

Equity, Ownership, and “Family Benefits”

Family business owners can also face family drama when it comes to stock options, equity, or shares in the company. These kinds of non-monetary compensation are common in small businesses, but in family businesses, the idea of awarding a non-relative a share of the company can cause hurt feelings. Children or grandchildren may feel like the CEO is “giving away their inheritance.” On the other hand, if your business has not yet reached the level of profitability to assure non-employees fair compensation, refusing to offer additional benefits may result in retention problems.

It is wise to include current and future anticipated shareholders in any decisions to offer ownership interests to non-relative employees. You may also want to work with a business attorney to write a partnership agreement or articles of incorporation that include options for family stockholders to claw back or buy back shares that would otherwise be distributed to non-relatives, in particular ex-spouses.

Setting Fair Compensation for Family and Non-Family Employees

When it comes to setting compensation for family employees and non-relative staff, there are several factors to consider:

  • Family members’ goals and needs
  • Market rates for work being performed
  • Demand for employees’ skills in the competitive market
  • Company cash flow and financial circumstances
  • Job descriptions and performance expectations
  • Overtime or added expectations beyond the job description
  • Productivity and performance compared to expectations
  • Interpersonal concerns including appearances of nepotism or favoritism

If your family business has not historically taken an objective view of compensation, applying those considerations may mean drastic adjustments to both employee and non-employee pay. Before making the shift, you should have a family meeting and a separate all-hands business meeting where you discuss the company’s goals and strategies for how you will get there. It may be beneficial to hire an external facilitator to run these meetings, as they can very quickly get personal or emotional for the everyone in the room, including the business owner.

David Stanislaw is an organizational development specialist with over 30 years’ experience helping family business owners with business compensation and succession planning . Contact us to meet with David to create a compensation plan that treats family employees and non-relative workers fairly today.