Mom and Dad started a manufacturing business for home products like glass vases and pie plates. They make products that are often sold to retailers but they also have a website. While they were raising their children Mom and Dad built the business and encouraged all of their kids to work in the family business. Their oldest son, Robert, had no interest and focused on playing sports with his friends. Their daughter, Regina, loved to show up in the old barn that had been converted to the original manufacturing site and watch glass being turned into lovely and useful items. The youngest son, Roy, enjoyed going with his mother when she would visit shops to sell the products and even went with his father when he negotiated with the national chain of kitchenware stores.
Eventually all three kids went to college. Robert became an accountant. Regina studied finance and spent her summers working in the family business. She was even the bookkeeper for one summer when Mom took some time to help the grandparents. Roy studied hotel and restaurant management and worked part time as a waiter.
After college the kids went in different directions. Robert worked for a large accounting firm and was very successful. Regina worked in all aspects of the family business and over time was being included in the running of the business. Roy worked for restaurants and hotels around the world.
As Mom and Dad aged and wanted to spend more time with the grandchildren they eventually asked Regina to run the family business. Thanksgiving dinners were great and everyone got along. The business was doing well and had one of its best years ever. There was cash on hand and each kid got a small distribution from the business.
One summer, Roy decided to move back home and live with Mom and Dad. While looking for his next role, he asked to be involved in the business. Regina, at her parents’ request, tried to find a role for him. He tried several things but none of them seemed to work out. Finally she made him the VP of Marketing. This business never really had a marketing department and Roy could build the role into something that could grow the business. Mom, Dad, Regina and Roy agreed to a small salary.
As it turns out Roy made little effort in the world of Marketing but enjoyed his life as it was. For little effort he earned a salary and had an enviable title in a growing business. One Thanksgiving, Robert asked what Roy did as the VP of Marketing. Regina disagreed with Roy’s grandiose assessment of his activities. She was irritated that she worked hard, was growing the business and Roy acted like the growth was because of him. Mom and Dad were surprised, and even worse, Robert asked if he could be the “Financial Advisor” for a salary and not have to really do anything.
The business had the ability to pay more dividends to the kids while taking care of Mom and Dad in their retirement. The business had the ability to pay for key roles but was getting to the point where it needed real professionals as a CFO and a VP of Marketing. There was real work to be done and the business required real workers. The brothers were complaining that the business was not distributing enough to them and that Regina was being given more than she deserved.What should Mom and Dad do? Let’s discuss some options for the owners of the business to think about when it comes to how to share the rewards of business. Here are some tools for parents that find themselves in a similar situation. Independent Board Members– To reduce the awkwardness and enhance management of this important family asset, parents can add independent members to the board of directors. Independent board members might include business-people or financial experts with specific industry experience. The board of directors would exercise ultimate authority over decisions related to compensation, dividends and distributions, and hiring or firing of all or some of the leadership positions. Separate Advisory Board – An advisory board could meet and discuss business issues like a board of directors, but it would be separate and different from the board of directors and would not have the fiduciary duties and responsibilities of the board of directors or control of the business policy like the board of directors. The advisory board can be made up of the outside business attorney, an outside accountant, a family business consultant and/or other respected and trusted professionals. The advisory board could render specific and knowledgeable advice about any number of business issues that are of concern to the family, including the relationships within the family. Position Description – Clear communication solves or eliminates many problems in any company. In the story above there is confusion over what is required of a VP of Marketing. Clear position descriptions include a brief summary statement, a list of required skills, education and experience and a list of activities that the role is responsible for. It should also name who the position reports to. When a person is asked to fill a role, the position should be discussed and there should be agreement over the position description. If not, the description should be rewritten. Compensation Study – With good position descriptions, an experienced professional can undertake a compensation study. This study will compare the positions of the target company with similar roles in similar companies. From this a compensation package for each position can be developed. It can include salary, bonus, long term compensation, benefits and more. Performance Evaluations – A structured performance evaluation system has the ability to make what can be quite judgmental into something that is objective, practical and useful. At the beginning of a performance period, usually a year, each employee will fill out a form that discusses responsibilities and sets goals. Once done there will be a meeting between each manager and his or her employees. Ideally, the meeting will generate agreement on goals and responsibilities, and will include clear communication about what is expected. At the end of the period, employees will fill out another form that uses the inputs from the beginning of the year and they will write a self-assessment of their performance. Again, there is a meeting between manager and employee to discuss the performance over the period. This can be the basis for setting goals for the next period. Skip Level Survey – Getting multiple opinions on performance, including perspectives from employees more than one management level removed from the employee being reviewed, helps to build a complete understanding of the role an employee has played. This tool can take minimize the “he said, she said” debate we see above between Roy and Regina. It may be important in some family businesses that there be anonymity to encourage real feedback. The questions should cover work environment, leadership feedback, employee satisfaction and team dynamics. Peer Survey – In addition to being able to measure an executive based on feedback from the team that he or she supports, we can learn a lot about an executive from his or her peers. As with the skip level survey, anonymity may be important. The important things to cover when using this tool center around working well as a team, integrity, team effectiveness and team dynamics. These are all different and important aspects of leadership which can be useful in guiding and compensating people in key roles. At Risk Compensation – Parents should also consider that possibility of minimizing compensation like salary and moving more of the compensation to At Risk Compensation. In the situation above, Mom and Dad would be better served to design compensation for Roy around marketing projects completed, growth in new markets, website clicks and other measurable ways to assess activity. Designing compensation using the tools mentioned above can create an environment that is fair, where communication can be based on facts and feedback. Many of these tools can be designed with the help of outside consultants that have experience in customizing the tools for a specific business and in implementing them when ready. Having tools to address the concerns of parents, children and employees can go a long way to avoiding an unpleasant surprise at Thanksgiving. Keith Baldwin is a business transactions and securities lawyer with a forty year history of serving clients’ legal needs. Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at [email protected] or directly at 425.646.6133. 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.