Compensation. Fairness. Can the two coexist as peaceful siblings in a family business?

Pay day sticker

Given the potential for conflicts between employees, whether they’re related or not, you may be tempted to believe the answer is no. Yet, to prosper, your business needs to attract and retain qualified workers – both family and nonfamily.

A formal compensation system may be the solution. An objective plan can enhance performance, eliminate perceived unfairness and burnish the professional image of your business.

Here are tips for developing a formal compensation plan:

  • Written job descriptions Clearly defined duties and responsibilities aid in establishing minimum and maximum salary ranges that apply to family and nonfamily employees. These ranges are often based on marketplace conditions, that is, what comparable companies in your region are paying for similar experience and length of employment. Written job descriptions are useful in matching the skill set of potential hires to the requirements of the work during the interview process. Family members who are learning the business “from the ground up” by transferring to different positions may also find the descriptions helpful in identifying potential areas of interest.Additionally, written descriptions spell out the competencies, values and tasks that will be used as part of recurring performance evaluations.Specifying the skills, experience and expectations for a position may reduce costly turnover.
  • Standard base compensation packages Eliminating the appearance of nepotism helps increase the involvement of nonfamily employees in the success of your business. A standard pay plan consisting of the annual salary, an annual incentive bonus, a long-term incentive program and benefits puts everyone on level footing. However, while benefits such as health insurance, paid leave and retirement plans generally are similar for everyone, a standard package does not mean all employees receive identical pay. For example, annual incentive bonuses can be tied to performance, which provides a reward for your best staff members. Your business also profits, as both family and nonfamily employees are motivated to play an active role in achieving business goals.Family members may participate in a separate bonus pool, a dividend plan or an equity plan involving voting or nonvoting stock. 
  • Defined evaluation practices Will you reward employees for meeting sales or revenue goals? Is customer retention important enough to your business to be a performance target? How about customer loyalty? What are the criteria for disciplinary action, and do they apply to family members? In a family business, other employees may perceive the chance for advancement as limited. Standard measures of performance make it clear that producing results will be rewarded.Structured practices can also make it easier to avoid hurt feelings and reduce conflict between family members. Placing emphasis on work behavior instead of personal actions or conduct is a way to remove emotions from the process.Design evaluation procedures to promote the business values that are important to you.
  •  Communication Keeping employees in the loop regarding changes to your compensation system leads to greater understanding of what’s expected, which may improve morale. While individual pay levels remain confidential, frequent communication about the specifics of the overall system eliminates fear and resistance. Use feedback from employees to identify incentives and actions that are less successful, as well as to update and refine your plan. Routine, consistent meetings provide family members with an opportunity to talk through problems and concerns in a constructive manner. Family participation in the creation of a written plan can also develop individual and business goals.Take advantage of communication sessions through meetings or email to update employees on the cost of fringe benefits, which add significantly to total compensation.

Creating or changing a compensation system in a family business may involve income and estate tax considerations, as well as noncash factors such as family dynamics. Your CPA can help you design a solution tailored to your business that’s affordable, practical and equitable.