Trending: Scorecards in a Family Business

Family businesses - just like all other businesses - need to evaluate their employees and prospective employees.  In a family business, however, there can be any number of sensitivities around this process that might not exist in a business where the owners, managers, operators and employees are not also related.  We have seen a trend lately where  family businesses take a novel approaches to this process using a “scorecard” to balance the business requirements with the family sensitivities that might come along. Keep in mind, we’re not talking formal performance reviews of the type that might be used with any non-family employee.  Rather, the scorecard can be as objective or subjective as the family leaders choose.  What goes into the scorecard, and what the family leadership does with the scorecard, is up to them.

Let’s take an example:  a successful retail operation with multiple locations and with different family members - say, children of the family matriarch - in charge of the various locations can be scored on financial and/or non-financial performance.  Some of the more obvious objective metrics are sales, attendance, customer satisfaction and per-square-foot profitability.  But there can also be subjective scores on motivation, attitude, commitment, social skills, intelligence, desire, energy or leadership.

To make the most effective use of a scorecard approach, it’s important to decide in advance how the scorecard is going to be used.  If the results will be kept tightly guarded (for example, when a parent is comparing offspring on their subjective or intangible qualities), the scorecard can be highly subjective.  If the results will be used to provide public recognition to the high performers, or for goal-setting and coaching of the low performers, the criteria should be more objective, and could be used for family members and non-family members alike.

Compensation and opportunities for individual growth within the business can also be based on scorecard results, particularly with objective metrics.  In those cases, sharing the results will be productive.  But don’t be surprised if a scorecard system results in competition within the family, and don’t shy away from making sure that such competition is healthy for both the business and the family relationships.  Scorecards should result in better performance that adds to the economic bottom line.  Make sure you know your family.  If they can handle competition, have fun.  If not, watch out.

Scorecards can and should be used to drive the metrics of the business and to measure any important statistics.

Scorecards can also measure too little or too much.  We recommend a “top 10” approach to scorecard evaluations.  This approach requires owners and managers to brainstorm what is important to the business.  Scorecards work best if they are time-based.  Whether they are prepared annually, quarterly or monthly, it’s useful to be able to compare scores period over period to be able to show trends of improvement or decline, and to gain perspective.

Scorecards should be modified over time.  There will be a learning curve for owners and managers in determining what the key performance and other metrics should be.  One recommendation - every time you add a new metric, think about removing another one.  Keep the scorecard fresh and relevant.

Finally - just one important legal note:  make sure your scorecard complies with applicable employment law.  Scorecards should not be used as a tool to unlawfully discriminate among family members based on protected classifications such as gender, religion, sexual orientation, disability or race.  Even family members have legal rights under discrimination laws.

Keith Baldwin is a partner in the Family Business Practice Group of Davis Wright Tremaine LLP, in Bellevue, Washington. His practice includes advising family businesses on corporate governance, business succession, mergers and acquisitions, and corporate finance.

Jonathan Koshar is a finance and operations consultant focused on adding value to businesses for their owners.   Based in the Seattle area, he has brought value to many clients in many industries and all sizes of business from startups to Fortune 100.