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.

• Do not hire family members to do jobs for which they are not qualified and do not retain family members in positions where they are performing poorly. This hurts the business and therefore hurts all the current and future family members who own the business today and who will benefit from ownership of the business in the future. It also hurts the individual who has been set up for failure rather than success on the job. Develop a job description with clear job duties and qualification criteria for each job in terms of education, knowledge, experience, and skills in accordance with industry standards. Prewritten job descriptions that can be tailored for your needs and Descriptions Now job description software can be purchased at the web site www.hrtools.com

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.

• Require family members to get several years of professional experience outside the family business early in their career. Often family members who do not have the opportunity to work in professional positions outside the family business come to the family business with unrealistic ideas about the effort required to be successful in their jobs and unrealistic ideas about pay and advancement. All people need a basis for comparison to enable them to realistically assess employment in your company.
• Have a professional development plan for each family member that requires family members to get significant outside continuing education each year. Colleges offer continuing education and certification programs outside the regular degree programs across a broad spectrum of professions. Industry and professional associations also offer excellent programs. This requirement might start at a minimum of 40 classroom hours per year. Full tuition reimbursement should be offered for passing each course (possibly with a minimum grade level achievement), or tuition loans with loan forgiveness provisions could be utilized.
• When the business outgrows a family member’s capabilities, then you should either find another position in the company for which they are qualified, or require them to get the training necessary to meet the growing challenges of their position, and/or hire someone above them to handle the growing complexities. If you choose the latter course, then you should consider reorganizing the department with new job titles and revised responsibilities for the family member and the new hire.

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.

• Pay a competitive wage for the job responsibilities and the results achieved by the individual. Purchase industry pay surveys or conduct pay research of competitor practices on an annual basis. A list of free pay and benefit surveys available on the internet can be found on the Internet Resources page. Ask us about customized research to find published survey data.

Many families overpay or underpay family members. When you overpay you may make the family member a prisoner of your business because they would have to make a financial sacrifice to work for another company. If troubles develop with the employment relationship, this can lead to resentment and lingering employment relationships that are damaging to both the business owner and the family member. When you underpay the family member, resentment may also develop because the family member may stay in order to preserve his/her position in running the business after the retirement or death of the business owner. Meanwhile, the family member feels exploited.

Showing equal love to family members does not imply that you should pay them equally. Salary should be in relationship to the market worth of job duties performed. Bonuses should be given in relationship to measurable performance results achieved. However, business profits may be thought of as a dividend where division would be

1. divided up according to ownership interest, or
2. divided up equally or according to family relationship
3. divided in accordance with performance criteria

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).

• Develop performance measures for jobs held by family members and appraise performance several times a year to make performance expectations clear, give them feedback on how they are doing, and give them guidance on how to improve their performance and focus their efforts. Without objective measures of performance, performance appraisal and tying pay to performance becomes extremely difficult and is likely to be perceived as personal rather than objective. It also makes it difficult to pay people fairly in relationship to their performance without causing inappropriate feelings of favoritism or feelings that the pay is a personalization of the relationships. Developing performance objectives and measures is one of the most difficult tasks for the business owner. Books that can be helpful in this process include “How to Measure Managerial Performance” by Richard S. Sloma and “Sample Employee Performance Measures” by Jack Zigon.
• Set up a family business human resource committee that includes the business owners who are active in managing the business and a board member from outside the family and the business. The purpose of the committee would be to make recommendations or decisions regarding policies and actions related to employment, development, promotion, termination, pay and benefits for family members. This enhances objectivity of decision-making, makes decisions less personal, and enhances acceptance of decisions by those who are affected. The outside board member may be a human resources consultant or an executive from another company.
• Hold a meeting with family members to explain the philosophy and criteria for family employment. Write a family employment policy and distribute it to all immediate family members and those more distant family members who express an interest in joining the business.
• If assistance is required, an employee compensation consultant can help with writing job descriptions, obtaining competitive data, designing formal salary ranges, bonus programs, and performance measurement systems. Referrals to a consultant in your area may be obtained by contacting the national certifying body for the compensation profession, WorldatWork (formerly the American Compensation Association) www.worldatwork.org or 480-951-9191.

For additional information about this topic, contact

Mae Lon Ding, CCP, MBA
President
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