Do's & Do-Not's of Hiring & Paying Family Members

By Mae Lon Ding, President, Personnel Systems Associates

Family business owners often want to provide an opportunity for family members to profit professionally and financially from employment in the family business. However, employing, managing and compensating family members is one of the most difficult issues that a business owner can deal with because family relationships can inappropriately influence business decision making . . . and business decisions regarding family member employees are often perceived as a reflection of the family relationship. Being in business with family members is likely to increase opportunities for conflict and magnify any communications difficulties that exist between family members. Following is a list of recommendations to follow in the employment of family members in order to manage the inherent difficulties of putting family members in the business.

Use job titles which reflect industry standards and which avoid inflation. For example, do not use "Sales Manager" when "Account Executive" more accurately reflects how the individuals spend the majority of their time. If the company finds itself in the position of needing a true Sales Manager later, it may make it difficult to hire someone for the manager position without giving the new employee an inflated title and pay expectations (see point number four below about the business outgrowing family member capabilities).

If you wish to bring family members into the company and they do not qualify for the jobs that are available, then one of the following courses may be followed:

If you believe the family member could pick up the necessary skills and knowledge in a year, then set up a trainee position. A trainee job would have a definite time window of existence of, for example, one year. During that year, you set up clear criteria for training, education, knowledge and skills to be gained. The training wage might be 20% lower then the competitive wage for the job. After the end of the training period, the person would receive a promotion and a wage that reflects the value of the contribution expected. If the training wage represents a hardship for the family member, then the family could extend a loan to the family member. This is better than paying a higher than warranted salary, where the family member may be given an inappropriate expectation as to the value of their services which could follow them throughout the life of their employment with the company.

If you believe that the family member will require more than a year to meet the requirements for the job, then suggest that the family member work outside the family business until appropriate training and skills are acquired, or until a position opens up for which they are qualified. This is good for the family member and good for the business.

For example, when a business is small, the family member with an AA degree and clerical work experience may be a decent bookkeeper, but if the business grows from $1 million per year to $100 million per year, you will need to hire real accountants, an accounting manager or controller, and perhaps a Chief Financial Officer. The family member should be encouraged to get a bachelor's degree in accounting and the new employee should be assigned to develop the family member's skill, knowledge, and experience to prepare him/her for higher positions with the company.

The point is to make it clear that the person's pay is as much as possible in accord with the value of their job and performance (and which should not be confused with value as a human being, or love which you feel for them).

For additional information about this topic, contact

Mae Lon Ding, CCP, MBA
Personnel Systems Associates
Pay and Performance Management Consultants to
Middle Market and Family Businesses
7551 E. Moonridge Lane
Anaheim, CA. 92808
Phone 714-281-8337