Family-owned businesses are extremely complicated. It is no surprise that many active family members are struggling to find the right balance. When we are tasked to prepare compensation and benefits policies for next-generation leaders, we are always confronted by family members emphatically expressing that “work” and “life” have been conjoined since birth. That they have been pre-programmed to embrace this setup years before they officially joined the business. That ownership and management are one and the same. This dilemma can be very stressful even more so when there are no rules of engagement when they start working, but it does not end there. The hard part is compensating family members fairly because any discussion related to pay can instantly spark conflict. Therefore, I would like to direct this question to the founders and business leaders, "Are you compensating your children the right way?"
Tendency to Underpay
Let me start with the most pervasive practice within the family business ecosystem: Business leaders, especially founders, tend to deliberately underpay family members under the pretext that it will motivate them to work harder and help them understand what it means to be frugal. Regardless of whether it is in Asia or other parts of the world, it is clear that many parents undercompensate their children to either convey a powerful life lesson or control their lifestyle. Even if the objective is purely to ingrain values like hard work, modesty, and frugality, underpaying and equalizing the children's compensation are dangerous practices that must be discontinued. Though noble, this conservative parent/founder/owner mindset has its downsides. The hardworking members sense this practice as unfair, especially when they see other siblings not putting in their efforts. Their feeling of being treated unfairly may further intensify when they hear that their friends are happily receiving market-based compensation while enjoying freedom from their parents. Aggravating this evidently unjust pay is the lack of family employment rules under an undefined and informal workplace structure. This confusion can put a heavy strain on family relationships, which can continue long after the parents are no longer around when left unresolved.
David Harland, the co-founder of FINH, cited the demoralizing effect of undercompensating children, “the problem of money is complex since it can be tied up with issues of fairness, approval and even guilt. As the children count the long years for low wages working for the family enterprise, they also see opportunities outside pass them by. There is no doubt that low salaries can also leave family members too dependent on the family for their livelihood and this eventually builds resentment.” As the adult children grow their family, household expenses multiply and the feeling of injustice transforms into some kind of grievance that morphs to hostility when ignored. Many possible issues can happen under this unsettling environment:
a. The hardworking family members will become demotivated and their appetite for working long hours will slowly erode.
b. If they have not done it yet, we should anticipate family members considering additional sources of income outside the family business.
c. They will set up their own businesses with their spouses or friends. When their start-up business gains traction, you can expect the adult child to spend more time pursuing his or her own business and devote less time to the family business.
d. Conflict of time: Time spent for the personal business usually starts with email exchanges, virtual meetings, extended lunch breaks, and fewer hours on a Saturday. And before you know it, there will be days that the family member is no longer reporting for work in the office.
e. Conflict of interest: Using the resources of the family business (employees, vehicles, office supplies, etc.) for personal gain, which can create confusion among employees and can destabilize relationships among family members.
f. At worst, the family member puts up a business that directly competes with the family enterprise.
A founder or business leader ignoring these telltale signs and tolerating this volatile arrangement will, without a doubt, inflame existing family tensions. This and the lack of a proper venue or forum to resolve these sensitive issues openly (family governance and pre-agreed rules) are recipes that can negatively affect family harmony.