Jordan Ramis pc. Attorneys at law
Family Business Hot Spots — Employment and Compensation of Family Members
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.
One of the most complex pieces of the family business puzzle is employment and compensation of family members. Employment and compensation issues of family members bring the two systems (the business on one hand and the family on the other) into direct conflict. Are employment decision based upon having the right last name or are they merit based? Generally a business is run to maximize profits while a family serves to nurture and support its members. Hiring the most qualified applicant may be best for the business but is that decision the best for the family, especially if its means passing up the first-born son. If the decision not to hire the son is made by the father, how will that effect his relationship with his wife, who is also the mother?

In many businesses the decision to hire a family member and the decision by the family member to join the business is based upon unspoken feelings of obligation or entitlement. Dad needs help to run the business. Daughter needs a job. The feelings of obligation or entitlement arise within the family system but are implemented within the businesses and lead to an employment decision. However, basing a career on these emotions may not lead to an enriching and fulfilling career and over time can create resentment.

Redefining roles is another issue that causes problems when a son or daughter comes into the family business. Can the children learn how to relate to mom or dad as a supervisor whom they can take direction from or are they too "old" (i.e. no longer the child) to listen to their parents? Can mom or dad learn to treat and judge their children as bona fide employees and give them the responsibility to grow and succeed or will they stifle that growth? Role confusion between the parent/child relationship and the employer/employee relationship can wreak havoc on both the business and the family.

Compensation of family members is another minefield. It is not uncommon in a family business to find some or all of the following compensation policies: using compensation to maintain parental control; using compensation to resolve family conflicts; using salary substitutes i.e. the corporate credit card; compensating all siblings equally; or basing compensation on need. These compensation policies are based on family concerns of nurture and support rather than merit or productivity. There are very few compensation experts that would recommend a policy based on these principles.

Employment and compensation decisions relating to family members raise many complex issues that have long-term impacts on both the family and the business. The default policy — hiring based upon last name — does not work. It is highly recommended that prior to bringing family members into the business, the family develop explicit policies on (i) qualifications for entry into the business, such as education and prior work experience and (ii) objective standards for determining compensation. Otherwise the pressure from the family system can lead to decisions that are not appropriate for the business or the family members who are trying to make a career in the business.