How to Establish an Effective Compensation Program
This is often the response we get from Dad when asked about compensation for family members, "We pay them all the same, and it is working out just fine." The fact is, they are all being over compensated for their positions in the company, so why would they complain or rock the boat? However, the response from the family members is often quite different. For example, matters of responsibility levels, terms of employment, experience, education, productivity and time spent at the office are questioned. Spouses often question compensation based upon lifestyle comparisons, time without their mates due to commitments at work or benefits others receive and they don't. Without question, the issue of compensation is one of the most volatile that families in business must consider.
What to Avoid
Seek to understand the role of confusion between being an employee/manager versus a family member. Develop an attitude that companies compensate employees, not parents doling out cash and other goodies for their children. We often see parents use compensation for the following control situations
- Luring a family member into the business by over compensation,
- Underpaying the family member to demonstrate frugality,
- Easing sibling tension and parental resentment with cash bonuses, and/or
- using titles, trips or other perks to moderate family unhappiness.
What We Recommend
Step 1: Develop a company philosophy about compensation. Include shareholders, directors, management and active family members. Determine the group's goals and principles that will guide future decisions about overall compensation. For example, if the group decides to maximize profits, this could translate into low pay for employees. However, if the group decides it wants to create lifetime employment opportunities for individuals, compensation would be higher than most in your town, region and industry.
Step 2: Determine the elements to be included in the company compensation package. For example,
- Base salary (job description, compare city, market and industry standards),
- Bonus (other forms of short term incentives, contests, achieving personal and company goals or extraordinary performance),
- Deferred compensation or long term incentives (retirement plans, profit sharing, company stock), and/or
- Fringe benefits (insurance, automobile, vacations, etc.).
Step 3: Formulate a committee comprised of both insiders and outsiders to research area companies your size, regional, national and industry. Use sources such as trade groups, local employer associations, and industry suppliers. Then nail down comparative data for the positions of focus. Decide what percentage above or below the median jobs will fall. For example, if you discover the median base salary for the number two man in most companies is $65,000, decide what percentage, based upon company compensation philosophy, you are willing to adjust from the midpoint.
Step 4: Dealing with bonuses and fringe benefits can be tricky without using preparation. The object of short term incentives is to create an attitude in the employee to achieve certain company goals, like awarding or earning extra cash as a salesman because objectives were exceeded. Or the sales manager could earn extra income because she monitored and achieved a higher than normal profit margin for sales. We suggest a grading scale of excellent (50 percent), good (25 percent), or poor (0 percent). For example, if the profit on sales is 30 percent, and for a certain period it was 40 percent, the manager could earn incentive pay of up to 50 percent of his/her income for that period based upon an excellent rating.
Step 5: Long term incentives might include such items as retirement plans, profit sharing and company stock. These benefits are usually provided for top management only. Under normal conditions, we recommend withholding these types of incentives until the person has demonstrated a commitment to the values of the company, values such as uncompromising loyalty shown to shareholders; a minimum of six years service to the company; proper education; leadership ability; compassion to fellow employees; hard work; and honesty. Has the employee undertaken a major challenge for the company and accomplished it successfully?
Action Step: Write or call the HFBC to request an Individual Compensation Survey to be filled out by active family members, then discuss.·
About the Author:
Mike Henning is a consultant and speaker on family business issues. This article was adapted from the Family Firm Advisor, a publication of the Henning Family Business Center, located in Effingham, Illinois.