Remuneration is one of the thorniest issues facing family businesses. Salary issues vary according to the stages the family business goes through during its life cycle, as it faces the different generational successions. This is why it is important to take care of this aspect in order to neutralise a potential source of internal conflict.
This first stage in the life of family businesses is perhaps the one that poses the least conflict. Because the company is unquestionably run by the founder. Meanwhile, the next generation is just starting out in the business and usually accepts his decisions on tax savings, family donations, estate planning, retirement plans, etc. without opposition.
The complication increases as time goes by and the children take on more and more responsibilities within the family business. When it is time for the handover, the parents will have shaped the salary expectations of the second generation leaders as they progress through the business.
One possible strategy is for each sibling to receive different remuneration according to his or her training, functions and performance. However, such decisions pose risks for family relations. It is no coincidence that it is at this stage that conflicts over salaries often arise. It is advisable to confront them with a frank and open attitude. This is a way to dispel suspicions and to strengthen the commitment of all family members to the company.
In second-generation family businesses there are usually two possibilities:
Long-term planning is important to avoid that the first children to join the family business end up with a very high and steadily increasing salary. This can lead to conflicts with the children who decide to join the company later on.
Creating a holding company for the family shareholding can be highly advisable at this stage. This will help to achieve the above objectives.
When it is the turn of the third generation, a new era begins for the family business, which increasingly resembles a conventional company. Because not all family shareholders work there. Some stay away from the day-to-day business and only receive dividends. And their point of view must also be taken into account when calculating the remuneration of family members who do receive a salary from the company. There is a risk here that they may perceive that they are overpaid, at the expense of their dividends. However, those who work in the company may feel that their degree of emotional involvement in the entrepreneurial family project is underestimated.
This is a source of conflict that can end up having disastrous consequences if a rational, open and professional remuneration scheme, similar to that of a non-family business, is not adopted. It is very useful in this respect to take as a reference the average salaries paid in companies of similar size and in the same sector.
Initially, a family business is usually the brainchild of a single entrepreneur. Over time, however, ownership is likely to be divided among successor-heirs. As the growth of the family dilutes the shareholdings of individual members, it may be necessary to establish additional incentives for managers. It is recommended that these incentives be linked to increased shareholder value.
Good planning and management of the remuneration plan depends to a large extent on the health of institutional coexistence in the family business. In this sense, having a family protocol is often useful, among other things, to establish the conditions for family members’ access to management positions and to draw up salary policies and career plans. The drafting of such a protocol usually requires an external source of advice that can gain the trust of active and inactive shareholders alike.
Having a family holding company at this stage is essential.
Are you looking for support in planning your remuneration or creating a family protocol? Then let us show you the way to effective and fair management. Let’s talk soon.
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