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    INDEPENDENTS REPORT: Relative worth

    Compensation in a family-owned business should depend on merit, not on an employee's last name.

    While many issues can ignite controversy within the family business, perhaps none is as emotional or as difficult to manage as compensation. In many cases, parents seeking to create a more harmonious environment among siblings working in the business establish the same rate of pay for each, regardless of education, experience, or ability. But is equal always fair?

    According to Dr. John Eldred (see sidebar at far right), pay systems within family businesses are too often designed not to promote competence but to avoid conflict.

    "It's human nature for Mom and Dad to want to treat their children equally," Eldred says. "But the fact is, not every job is worth the same amount of money, and not every sibling contributes equally to the organization in terms of time, energy, and effort."

    What an owner must contribute to the business, and ultimately to the family, is an architecturally sound pay system. "Owners must have the wisdom to invest in human capital, and at the same time they need to separate ownership from management," Eldred says. "I've encountered some founders who were either too lazy to figure out what their kids were worth, or they had no guts to confirm the truth."

    In developing a sound pay system, he offers the following advice:

    •Pay for performance: Determine what each position in the company is worth in the marketplace, and pay accordingly.

    •Establish written job descriptions and measurable performance goals for each position: "Remember, the game of business is the language of numbers," Eldred says. "A business owner must practice quantification—not their hobby."

    •Establish an outside board of advisers to assist in developing a written pay system: According to Eldred, advisory board members assume no legal responsibilities on behalf of the corporation. Typically, those who are paid for their services, which can include attending quarterly review sessions and participating in conference calls and meetings, view their positions more seriously.

    •Institute a philosophy of "business first" vs. "family first": Operate the company as a business in which family members work. According to Eldred, "Too often, compensation is viewed by siblings as a symbol of the amount of love and power that parents bestow upon each child. When based on emotion and not quantification, the pay issue becomes very unobjective and irrational."

    •Issue phantom stock: A concept growing in popularity, phantom stock is an effective way to reward key individuals who have, through exceptional performance, increased the value of the family enterprise. Benefits of stock appreciation are awarded without legally giving up ownership rights and control. "Issuing phantom stock requires an owner to secure a professional valuation of the business and a re-evaluation at the end of an established time frame," Eldred says. "A cash payment representing a percentage of the increased value in stock incurred during that time period is paid to the phantom stock recipient. In exchange, the individual should be expected to mentor next-generation owners."

    •Hold performance evaluations: Eldred suggests that all associates, including family, must participate in the performance appraisal process. While he feels parents should take part in each family member's evaluation, he also suggests enlisting the advisory board, which will lend objectivity to the process.

    Drawing a line between family and business is no easy task, but, according to Eldred, it's necessary in order for both family members and the company to earn respect. "Nonfamily employees at all levels must understand that the owner's son or daughter is there to earn their way in the system," he says.

    Furthermore, Eldred suggests that when pay is based exclusively on job classification and performance, future leaders are given the opportunity to develop a "profound sense of competence" instead of entitlement.

    "Entitlement is a psychological condition in which the kids think they're owed something by virtue of their last name or relationship to the owner," he says. "To avoid these feelings, they must make the deep psychological connection between effort and outcome."

    He explains: "If an unearned bonus is given to a son or daughter, it destroys credibility, and that person really never gets the chance to be grown up. At the same time, they're viewed by others in the organization as a joke."

    Eldred says he's found no issue that causes greater conflict than money. "Conflict is like cholesterol," he says. "There's good and there's bad. We can avoid it, seek to dominate one another, or negotiate."

    He adds: "Conflict resolution is achieved through constructive dialogue and negotiation—not by figuring out who can argue the loudest. I've always found that truth can and will emerge when discussions are had in nondefensive ways."

    Independent Retailing editor Jane Olszeski Tortola can be reached at [email protected].

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