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Posting by: Jacqueline Thompson
Date: June 15, 2009
Compensation, especially within a family-owned business, can be a
touchy subject. I once worked with a gentleman who had opened up his
own HVAC business when his five children were young. As the kids grew
up, all four of his sons eventually ended up in what would become the
family business. The sons started working during summer vacations
while they were still young, then each joined the business full-time
after graduating from high school. The owner became puzzled, however,
when his sons began showing signs of discontent, and the youngest one
even left the family business. When I began reviewing compensation, I
found that although the second and third sons had continued their
education and received appropriate HVAC certification, the eldest son
was the most highly compensated. When questioned, the owner noted that
the eldest child had a wife and two children depending on his income.
The second son was married to a woman who had a professional job and
was well compensated, and the third son, who was the second most highly
compensated, was unmarried and had only to support himself.
An overall study of the business revealed that it was the third son who
had really stepped up to take a leadership role within the business,
and the first son had an ill-concealed drug problem. The two younger
sons still in the business were being underpaid by an average of 30%
compared to industry averages, yet the owner did not change his
compensation practices. His belief was that the eldest son had
children who needed the income, and that one day the third son would
inherit the business. In the meantime, it was business as usual.
Eventually, the second and third sons left the family business and the
eldest son bought out the father for complete ownership. He lasted for
less than five years, and the business is now defunct.
What went wrong? This was a classic mistake in family business
compensation. Too often, parents find that they take personal issues
into the business, especially as it deals with compensation, leading to
problems. Family member employees are best paid based on fair market
value for the position they fill. Fair value for a given position is
relatively easy to establish, and can be built into the cost structure
of a business. The owner of the HVAC company found that after the
second and third sons left the business, he had to pay an overall
increase of 40% in compensation to replace them. There are many
possible reasons for the eventual failure of the family business, but
unequal compensation practices very likely played a major role in this
case.
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