Leadership compensation planning can be a tough problem for family businesses, especially when family members work in positions that differ widely in levels of responsibility. There is often a blurring between what should be a business decision and what should be a family-related decision.
“Compensation issues are a frequent cause for family business owners to contact us seeking help,” reports leading family business expert
Don Schwerzler.
“Compensation disparities can quickly creative significant and emotionally charged disputes amongst family members.”
Schwerzler has been studying and advising family business entrepreneurs for more than 40 years and he is the founder of the Family Business Institute
Family Business Institute
and the web organization
Family Business Experts
, both of which are headquartered in Atlanta GA.
Gary Payne is a nationally recognized executive search consultant for C-level executive positions. Leadership compensation planning is part of the placement services that Gary helps to negotiate with clients. Here are some of Gary's recommendations when dealing with leadership compensation planning:
Some Do's: Keep it simple. Do not try to accomplish too much with your executive compensation plan. You cannot manage behavior through a compensation plan, but you can reward it by focusing on one or two key productivity or profitability goals and mixing those into the incentive formula. Align the plan with your strategic goals. Make sure that they weigh in which you pay and incent senior management actually reinforces the behaviors you need to reach your corporate objectives. Make the plan visible and accessible. Communicate and reinforce the plan on a regular basis. If necessary, use a professional (an outside consultant, not your attorney) to communicate the plan. Provide financial education. Once a year, conduct a seminar for your senior officers and their spouses to provide some financial education, not just around the plan but around personal financial planning in general. Plan for the long term. A well-constructed executive compensation program should not necessarily be driven by what you need to accomplish today. It should have some enduring value. Take care of the plan. Do not let it just sit on the shelf gathering dust. Properly administer the plan and adjust as necessary.
Some Don'ts:
Go overboard with complicated formulas. Keep your incentive targets and payout formulas as simple as possible. Complex formulas do not do any good if you cannot track them and/or people do not understand them. Build your plan around a specific product or service. Laws can (and do) change overnight. A product that looked good when you bought it can quickly turn your plan upside down. Underestimate the tax/accounting issues. Make sure you understand all the tax and accounting issues and communicate to your people their legal rights and obligations in regards to the plan. Try to fulfill every individual need. Instead, strive to build an overall competitive package that provides a good balance of pay, incentives, benefits and retirement, so that it can fit anyone who walks in the door.
Finally, step back and look at your compensation program as an outsider would. Ask questions like:
Is our compensation plan fair to our executives? Our shareholders? The organization? If it were open to public scrutiny, how would the plan fare? Are we compliant with all tax and accounting regulations? If we were publicly held, how would the SEC, NESB and institutional shareholders react to our plan?
“Executive compensation planning can be a minefield for family businesses,” concludes Schwerzler.
If your family business is having compensation-related problems, we can help! Simply use the ASK THE EXPERT form at the bottom of this page to open a discussion with one of our family business experts.
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