Sharing The Wealth How much is too much . . .or too little?

Nailing down salary amounts for employees is no simple task forany business owner--but for family business owners determining payfor relatives, it can be especially difficult.

"That's because crafting an appropriate compensationpackage [for] a relative is an art. Emotion gets mixed into thenumbers," says Linda Wood, senior consultant in the humanresources branch of public accounting firm Tofias, Fleishman,Shapiro & Co. in Cambridge, Massachusetts.

At different times and stages, business owners may use any ofthe following rationales when deciding on salaries forrelatives:

*Family members shouldn't get paid what they would ifthey had the same job in another company because they own or willown a significant portion of this business and that should beconsidered part of their compensation.

Compensation involves more than just salary, so there's somevalidity to keeping base salaries low for family members who arealso owners when the business is involved in maneuvering aturnaround. Down the road, if the turnaround is successful, theseowners will be compensated handsomely.

"You have to pay a certain amount to [nonfamily] employeesjust to keep them, and you have to be competitive salarywise if youwant to attract top management talent from outside thefamily," says Wood. "So when things are tight, the familymay have to take a cut."

Families should be leery about instituting a policy that keepsfamily members underpaid forever, however. "Keeping familymembers' salaries low when there is no reason for it willeventually create problems," says Wood.

• It's my company, and if I want to pay my son, daughteror cousins more than they would get if they went elsewhere,that's my business. Anyway, they work harder than anyone else,and I want them to hang around to perpetuate the business.

"Any business owner who thinks he or she can keep thesalaries of family members a secret from other employees isdreaming," says Wood. So if you're paying your familymember more than others in the same or similar positions, you'dbetter be sure he or she is doing an outstanding job.

"People will understand when a family member gets paid morethan they do if the business is doing well and if the family memberis doing an effective job," says Wood. "Even moreimportant, [nonfamily] employees must feel they're beingcompensated well and being appreciated for what they do."

Sometimes, too, you have to pay a family member more because hisor her talent is top-notch, and you need to lure the person back tothe family business from another company where he or she is beingwell-compensated. That's what you'd have to do if youwanted to attract any top executive.

• I pay all my children the same salary. They all makesignificant contributions and play important roles in the successof the business. Besides, I wouldn't want anyone to feelslighted.

It doesn't make sense to pay everyone the same amount justto keep the peace. Don't be fooled--equality doesn't ensurepeace. In fact, it might have the opposite effect. It mightengender resentment among those family members who are making thelargest contribution to the business' success.

This approach does make sense, however, when the family memberswork well as a team and each person's contribution is essentialin making the entire operation run smoothly. For Roger Tofte, 68,founder of Enchanted Forest, an amusement park in Turner, Oregon,this arrangement works well. Three of his four children are in thebusiness and have their own areas of responsibility as managers.Mary, 37, is the business manager. Ken, 40, is head of the12-person maintenance crew, and he designs and makes the rides.Susan, 42, is the creative director of the park, directing andcreating the music and making the costumes for all the plays."They're the only managers in the company," saysTofte, "and their salaries are equal because they are allindispensable."

Patricia Schiff Estess writes family business histories andis the author of two books: Managing Alternative WorkArrangements (Crisp Publishing) and Money Advice for YourSuccessful Remarriage (Betterway Press).

Setting The Standard

So what are the criteria for determining reasonable salaries forfamily members in a family business? Ask yourself the followingquestions:

• Does the salary reflect the role the person is playing?A family member coming in right out of college may know a lot aboutcomputers and may even come into the family business as the MISmanager. "But that doesn't mean he or she should be paid asalary commensurate with a seasoned MIS manager," says Wood.Nor does it mean that the inexperienced MIS manager should make thesame salary as his or her brothers or sisters who have been workingin the family business for a number of years.

• How does the salary stack up to the salaries for comparablepositions in similar organizations? In your assessment, includethe type of industry you're in, the size of your company interms of revenue, the geographical location of your company asopposed to others, and the other companies' generalcompensation philosophy.

• How well are other employees and managers in your companycompensated? When you think compensation, consider base salary,short- and long-term incentives, bonuses, benefits and perks.Compensation for everyone should reflect the company'sperformance as well as individual contributions and should not beadjusted to accommodate an individual family member's financialneeds.

• How well is your business doing? What can you afford topay? This is an important business question that can't beoverlooked.

It's often difficult for the heads of family businesses totake the emotion out of determining salaries when it comes torelatives. That's one area where outside input comes in handy.Consultants or an outside board of advisors can be useful whenevaluating family members' salaries and total compensationpackages. The objectivity they bring to bear helps maintainpositive family relationships.

Contact Sources

Enchanted Forest, (503) 371-4242, http://www.enchantedforest.com

Tofias, Fleishman, Shapiro & Co., (617) 761-0600,http://www.tfsandco.com