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Fairness and Pay in Family Business

Posting by David Gage, Ph.D., Principal at BMC Associates, and Ms. Liubov Sivokhina. Ms. Liubov Sivokhina is a 2nd year MBA student at the Kogod School of Business at American University. Dr. David Gage is a co-founder of BMC Associates and an adjunct professor at the Kogod School of Business.

A popular saying goes, “Treat your business like business and your family like family.” But what do you do when business is family? What’s fair then? It shouldn’t be a surprise to anyone that many conflicts in a family-owned business arise from a feeling of unfairness. Oftentimes that “unfair” feeling revolves around money.

Can you imagine two siblings with very different jobs in Company A electing to take the same salaries? Can you imagine comparable siblings in Company B with very different jobs electing to base their salaries on market benchmarks? Can you see the advantages of both methods?

What happens if there are parents in Companies A and B who decide to set their adult children’s salaries the same (in Company A) and different (in Company B). Does it matter whether it’s the siblings or the parents who decide?

When is the “right” time to discuss compensation structures in a family business? Is it your sense that your family members are all on the same page about how your compensation system works? Are you one of the few who have had a frank and open conversation about it?

Money is among the most sensitive issues family business members must face and that may be a consequence of the many pitfalls people must try to avoid when deciding money matters, including:

  • Mixing compensation for a job with gifts to a family member.
  • Using pay to maintain parental control (e.g., luring reluctant children to work in the business).
  • Using pay to resolve emotional issues (e.g., to mitigate parental guilt or resentment among offspring).
  • Preserving compensation secrecy at all costs.
  • Confusing business and personal funds.
  • Taking relationship for granted (e.g., assuming family members will be okay with whatever their pay is “because we’re all family”).
  • Inflating titles or perks to compensate for unsatisfactory salaries.
  • Confusing equality in compensation with equity.
  • Failing to realize that for some people, their compensation is an indication of their self-worth.
  • Not recognizing that compensation is enormously more complicated if siblings are still struggling with competition issues.
  • Telling someone else what’s fair for them.

How do you ensure that all family relationships will remain harmonious, even after sensitive compensation discussions and decisions? We all try to be “fair” but fairness is an elusive concept. Ask yourself how you conceptualize fairness. Some of the possible principles you might be using include:

The Utilitarian Ideal, which maintains the correctness of an action can be determined by looking at the results or consequences. According to this principle, as long as the actions present the greatest good for the greatest number of people (e.g., creating the greatest amount of wealth for a family), any decisions fostering that end would be considered  fair.The Principle of Justice involves the fair treatment of each person, which according philosopher John Rawls, should include not only extensive basic liberties to all, but also equal opportunities.

The Principle of Caring is sometimes referred to as the feminist or care perspective because it emphasizes caring as opposed to justice. It maintains that organizations benefit by focusing on people as opposed to economic profit or other business metrics.

The Golden Rule – “Do unto others as you would have them do unto you” – is simple and appeals to many. It is distorted by some to mean “I will  treat you how I was treated,” which can feel perfectly reasonable and fair to the person in control but not so fair to the person on the receiving end.

Just like the feeling of fairness, the principles people employ can operate at an unconscious level. It can be advantageous to articulate and discuss the principle you rely on in determining family compensation because it can provide an entrée into a deeper conversation about the feeling of fairness. Conversations are easier to have when people realize there are not rights and wrongs when it comes to feelings, including feelings of fairness. The goal of talking can be greater mutual understanding.

 

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