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Compensation in Family Business

Compensation, especially within a family-owned business, can be a touchy subject. I once worked with a gentleman who had opened up his own HVAC business when his five children were young. As the kids grew up, all four of his sons eventually ended up in what would become the family business. The sons started working during summer vacations while they were still young, then each joined the business full-time after graduating from high school.

The owner became puzzled, however, when his sons began showing signs of discontent, and the youngest one even left the family business. When I began reviewing compensation, I found that although the second and third sons had continued their education and received appropriate HVAC certification, the eldest son was the most highly compensated. When questioned, the owner noted that the eldest child had a wife and two children depending on his income. The second son was married to a woman who had a professional job and was well compensated, and the third son, who was the second most highly compensated, was unmarried and had only to support himself.

An overall study of the business revealed that it was the third son who had really stepped up to take a leadership role within the business, and the first son had an ill-concealed drug problem. The two younger sons still in the business were being underpaid by an average of 30% compared to industry averages, yet the owner did not change his compensation practices. His belief was that the eldest son had children who needed the income, and that one day the third son would inherit the business. In the meantime, it was business as usual. Eventually, the second and third sons left the family business and the eldest son bought out the father for complete ownership. He lasted for less than five years, and the business is now defunct.

What went wrong? This was a classic mistake in family business compensation. Too often, parents find that they take personal issues into the business, especially as it deals with compensation, leading to problems. Family member employees are best paid based on fair market value for the position they fill. Fair value for a given position is relatively easy to establish, and can be built into the cost structure of a business. The owner of the HVAC company found that after the second and third sons left the business, he had to pay an overall increase of 40% in compensation to replace them. There are many possible reasons for the eventual failure of the family business, but unequal compensation practices very likely played a major role in this case.

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