As a family business matures, it is common for family members to grow into specific roles and responsibilities. The process works well if the roles are well defined as each person transitions smoothly into their role. Too often, people go into a role simply because someone needed to perform a set of responsibilities when they joined the business.
Successful businesses have clear roles and responsibilities for each person – family members included – and the individuals who fill those roles have earned the position. They have the skills, behaviors, education and motivations essential to meet the expectations unique to that role. Those expectations are well defined and the person’s performance in that role is monitored and evaluated to ensure those expectations are met.
One of the common challenges in family businesses is establishing an equitable method to determine how each person is compensated for the labor, management and leadership they provide for the business. Several factors need to be considered, and it is essential that the method be understood by all those affected.
Analyze your roles and responsibilities
The roles and responsibilities for each person in the business should be reviewed on an annual basis. A simple assessment of what your business needs, what each person does and how these two factors align may be all that is needed. If the business has gone through an expansion, there are significant changes in equipment or facilities, new people have been added or there are performance issues with people or areas of production, the review needs to be more comprehensive. Adjustments can be made based on the findings.
After completing any updates to roles, review the skills, level of responsibility, business impact, time requirements and other factors that would indicate that different amounts of compensation are appropriate. For instance, all roles must perform key functions and will have an impact on the success of the business, but someone whose job is to simply feed cattle and clean pens does not have the same potential impact on the company’s profitability as the person who designs the breeding and nutritional programs, makes marketing decisions, buys inputs and prioritizes major purchases.
The next step is to determine fair compensation for each role based on the duties and responsibilities. A thorough analysis would include researching comparable pay for similar jobs in other local companies. Accurate information can be gleaned from the local chamber of commerce and a review of job openings that have been posted in the most recent quarter. The company’s accounting firm can often provide input based on a confidential, anonymous summary of what similar clients provide for compensation.
For some office and management positions, local information can be found through professional job boards. For agriculture-specific positions, an internet search will reveal a variety of annual salary surveys performed by state universities, grain and livestock associations, recruiting firms and placement services.
Determine fair compensation
For each position, establish a range of compensation based on your findings and your own knowledge of each set of responsibilities. These results should reflect the difference between excellent performance and average performance within that role, as well as the difference in required skills, level of experience, time commitment and impact on the company between the roles. The pay range needs to be for total compensation, including all benefits.
Additional factors to consider include the years of experience a person has in a role, the level of education in areas related to their responsibilities and if they are on call after hours to address production issues. People whose background and role include these factors should be paid toward the high end of the compensation range.
Determining specific compensation for each person can be complicated when some family members live in company-owned homes with all the utilities, repairs and maintenance paid for by the business, while others live in a home they personally own. One house may be on a farmstead where livestock are raised and the occupants tend to those animals, and a different home may be a rental property owned by the company.
Some positions may require that transportation be provided, where others only need to be able to get themselves to work each day. Other family members may not need health insurance because their spouse has a job that provides this for their entire family. Single family members have different needs compared to those with a family, but this should not significantly impact the differences in compensation. Couples where both individuals work for the family business should be paid the same compensation they would make if they each worked in different businesses.
When some family members are part owners in the business and others are not, caution is needed when including an owner’s distribution as a significant part of their compensation package. Generally, their regular compensation should be based on the value they provide as an employee, and their income from ownership should be based on the profitability of the business.
The specific pay levels of a similar business’s compensation strategy can be used as a guideline for your plan, but don’t try to simplify your process by copying their compensation levels and assuming that since it works for them, it will be fair and equitable for your family and employees.
The actual money paid to an individual is calculated by taking the total compensation they are to be given, subtracting the value of all their benefits and paying them the difference.
The fairest compensation starts with the value that the person brings to the operation and then does its best to balance any unique benefits that each person is provided. Remember that anything paid to one family member sets a precedent that others may expect in the future.
Failure to pay a comparable wage for what the person would be paid by another employer leads to dissatisfaction and the significant potential of that person eventually working for someone else. Every person has to make the choice of where they will invest their skills, knowledge and experience based on what they feel is best for them and their family.
