For family business owners, determining compensation arrangements for family members is difficult. You want to be fair—but “fair” doesn’t necessarily mean “equal” when it comes to compensation.
Talking about salaries and profit distribution can create anxiety and ill will, which is why a formal family compensation policy is a must. This policy outlines the formulas by which family members are compensated and takes discretion out of the hands of the matriarch, patriarch, or family CEO. It sets realistic expectations for all family shareholders and employees and alleviates the need for uncomfortable compensation discussions or ongoing negotiations.
Generally, family members who work in the business should be paid a fair market salary for their jobs. Using this market-based approach promotes the perception of parity, both among family members and among non-family employees. It also lets you separate the family member’s salary—earned by contributing to the company’s success—from compensation derived merely by being a family member and shareholder.
For shareholders who don’t work in the family business, compensation typically comes in the form of a profit distribution. The distribution schedule should be outlined in the family compensation policy.
For example, if one sibling serves as president of the company, he or she might earn the largest percentage of the distributed profits. Other family member employees would earn the next-highest percentage, and family shareholders who are non-employees might split the remaining percentage.
Another policy element might involve different classes of stock. Family members who work in the company might have voting rights, while those who don’t work in the company might have non-voting shares.
Discuss options with your trusted advisors before creating the family compensation policy. Your CPA can help you think through the implications of these decisions and arrive at a plan that’s right for your business and your family.