Why are Compensation Issues in a Family Business Different?

Yes, pay issues in family-owned and operated businesses are different and in many ways more difficult to address than those found in other private (or investor-owned) companies. What creates this difference? In our experience there are several reasons that explain these differences. We have summarized five below.

As you read on, see if the same situations or explanations we describe exist in your business or within others you know.

1. There is A Lack of Detachment.--As a family-employee (or other stakeholder [i.e.: a company employee, company shareholder, to-be shareholder, an in law or other interested party]) in a family-owned and operated enterprise; you can never get away from the “office”. Issues such as differences of opinion regarding pay and approach will follow you home and anywhere else family members gather. As we often say: Be ready to talk about it over Thanksgiving dinner.
   
   
2. Pay decisions & Value are Seen Only Through Your “Filters.”—Compensation decisions within a family business are often considered and made by and amongst members of the same generation. These same family members have generally grown up together and have had many years to form impressions about the value or worth of other siblings (or cousins). With these same predetermined values and feelings in play, a sibling may now be asked to agree to pay a brother, sister or cousin substantially more or less than others—or themselves—based on the job each do. Why are they worth more than me? This is often a hard question to answer when your impressions and history (your filters) says otherwise.
   
   
3. Family businesses are often the great levelers of family-member talent and ability.—Some family members may institutionally earn more within the family enterprise than they could ever earn in the outside marketplace—based upon skill, experience and ability. And, the reverse can also be true. For example, in some cases all family employees may be paid the same—in spite of the fact that one is the CEO and another is a Maintenance Supervisor. Hence when the subject turns to the “real” value of each job (and it always does), generally at least ½ of family employees will want to stop that discussion immediately—for obvious reasons.
   
   
4. It is a democracy, isn’t it?—As family-owned and operated businesses mature and grow through succeeding generations, the number of family stakeholders (shareholders and other interested parties) can grow to a relatively large number. By the time the business reaches its 4th generation, it can have as many as 30 stakeholders—of which only a few typically work within the business.
   
   Consequently, many of these stakeholders will have little or no ownership stake in the company. Yet, every family stakeholder has an opinion regarding pay for family-members, and many will not hesitate to state it. These opinions may either be anchored in fact or firmly rooted in opinion or personal circumstance. “What do you mean you are going to pay the CEO $200,000 in salary per year? I hear that the job is worth half of that! I strongly object.” (Really means: Wish I could make $200,000 per year.)
   
   In a family businesses—unlike in many others—there can be many chefs wandering about the kitchen on the matters of compensation. Some will be helpful and informed, others will not—but they will have an opinion that cannot be ignored. Just like in a democracy.
   
   
5. Wait, whose money is that anyway?—Family business often have very complex and intersecting flows of pay, returns and cash distributions.  Some stakeholders (particularly those who are not employees) see all cash withdrawn from the business as compensation to be a reduction in possible reinvested capital and a possible corresponding reduction in firm value.
   
   Hence stakeholder pay decisions can be viewed as decisions to award cash value to a family-employee before other stakeholders can liquidate their ownership (or would-be-ownership) interests in the company or collect other ownership distributions, like dividends.
   
   Some would argue that while some family members are focusing on the health and growth of the business, others are trying to preserve the current value of the enterprise (as if it were an estate). Such tension can be constructive particularly in trying to prevent de-capitalizing the enterprise through compensation. While many companies face similar questions, this debate can be vivid in a family-owned business—and must be carefully managed within a family-stakeholder “democratic culture.”

In all of the above we have neglected to adequately mention the pervasive influence of “Mom and Dad” upon pay decisions in a family business. It is often their values and direction (implicit or not) that establish the company’s pay strategy and influence all pay decisions for the next generation, or longer. And, their values & direction are seldom challenged while they are active within the enterprise. We have seen this situation result in a frustrated (and self-enforced) silence as pay differences and opinions amongst stakeholders “boil” just below the surface. It is not unusual to also encounter this “back story” when the subject of compensation arises over the dinner table.

All or some of the above generally combine to make the management of compensation in family-owned and operated businesses different and potentially more difficult and challenging than in other firms. This challenge and difficulty can often lead to trouble within the company and family, unless effectively addressed. What should a company and family do?

Wilkening & Company has developed principles for effectively managing pay in family-owned and operated businesses based upon decades of experience addressing these challenges. We will outline those principles for you in next month’s E-Notes.

Wilkening & Company has advised family-owned businesses on matters of private and family-company
compensation for over 3 decades. In addition to compensation, we also have experience with family business succession, organizational effectiveness and Boards of Directors. If you have questions or
challenges, call us at (847) 823-5090, or write at bob@wilkeningco.com.

What to do when your commission plan is losing its “pop”

In our June 2012 edition of E-Notes we discussed the use of sales commission plans for the sales force and how to determine when such a simple pay arrangement best fits your sales process and sales force.

In last month’s article we suggested that if you found or believed that your current sales commission plan was no longer effective in meeting the needs of the company, there were proven solutions available to help restore its effectiveness.

As earlier stated, a commission plan is generally most effective within a new and evolving company or a sales channel where the seller is the primary selling influence and the company’s strategy leans heavily to the rapid growth of its market share. The risk of the market and the selling process make (and have historically made) the commission plan an ideal pay solution for both seller and company.

But, as a market or company matures and the sales process changes accordingly, a commission pay plan may lose its effectiveness. The risk and return relationship will usually lose its attractiveness to both seller and company—while the company sees either a slowing of sales growth or an erosion of profit margins. Further, the seller who truly desires the risk and return of a commission plan may have already moved on to greener pastures. This is a common situation.

If you suspect that you are in that situation and need to do something to improve your commission plan, we have found that there are generally two types of “in-place” solutions you can employ—short of throwing out the whole plan and starting over. Let’s discuss each.

1. If you are seeing your profit margins erode and your commission sales force cannot seem to control it, try the simple solution of changing the primary commission metric from sales volume to profit contribution (dollars). You will have to adjust the commission rate accordingly (upward) for fairness, but suddenly the discussion will change from only sales calls to pricing and profit margins.
   
   Of course some companies do not want to share their profit margins with the sales force (or anyone else) as this may be considered to be a competitive advantage. If that is true in your case (and reconsideration is not possible), use (for example) three (3) separate commission rates that vary based upon profitability.  Now some would ask: how many commission rates are too many? I use three as an example and would not personally advise any more for simplicity. I once saw a client who previously adopted such a multi-rate approach and was using twelve (yes, 12) different rates. Needless to say, that was too many.
   
   
2. If you are finding your sales growth is diminishing and your sales force is not really concerned (and remains pretty well and steadily paid—also not an unusual occurrence), try introducing a simple goal-based bonus or incentive in parallel with sales commissions.
   
   One thing lacking in the typical sales commission plan is an annual expectation of performance established by the company for the seller. This is a real limitation of commissions and sales growth may suffer. To address this, introduce a simple bonus or incentive, with the commission. It could work something like this:
   
   
   1. Pay a commission on every dollar of annual revenue as before but do so at a lower rate—at (say) one-half or two-thirds of the “old” commission rate.
   2. Then, establish an annual bonus that pays out incremental cash amounts based upon performance versus the company’s annual expectation of performance or achievement for sales volume.

As a general rule, pay the seller less (in combined new commission and bonus) than they would currently have earned under today’s commission plan if they fail to achieve the company’s annual revenue expectation. Pay the seller more than the current plan if they meet and exceed that expectation.

If you find yourself questioning the effectiveness of your current commission plan, it is likely something is wrong and remedial action needs to be considered. The two alternatives that we have offered are both proven and reliable ways for a company to improve profitability and grow sales volume in a commission-pay environment—without throwing out the entirety of the old plan.

If you like our ideas simulate one or both “in shadow” (calculating results only on paper with no impact on real pay) with your current sales pay plan for the remainder of the year. See who would make more or less and decide in the 4th Quarter whether a pay-plan design change would improve your sales effectiveness and performance for the coming year.

Try it. I bet you will be pleasantly surprised at the results.

Wilkening & Company has designed and implemented scores of sales-compensation plans for clients whose commission plan had lost their “pop.” Call or write and we would be glad to share our experiences and solutions such as our tested Bump & Run sales compensation system.

The Affordable Care Act (ACA) Survives its Supreme Court Challenge. What to do next?

This is the fifth (5th) article Wilkening & Company has published on the impact of the Affordable Care Act (ACA) upon businesses and their employees. We have written on the subject as recently as April 2012. A directory of (and links to) our articles is included at the conclusion of this note for your convenience.

When we last wrote on ACA it was our opinion that no matter what the outcome of the Supreme Court decision on its constitutional merits, three things were evident to us— 

1. Some portions of the law—primarily guaranteed coverage without consideration for pre-existing conditions—would survive in some form, even if ACA were stricken in its current form.
2. Most employees have no idea what is written in the law (nor do many employers) and will likely be shocked when companies begin to take actions directed by or suggested in the law—like to either continue to insure your employees or pay some unknown 3rd party to do it.
3. If an employer is prepared for the inevitable change that is coming they will be better off and will likely save themselves a bunch of money, plus avoid unneeded people & compliance trouble.

With the recent Supreme Court’s decision upholding the constitutionality of ACA, many believe that the future of the law now depends upon the result of the November presidential election. Some are taking a wait-and-see approach that surely demonstrates due caution and economy of action.

We continue to feel somewhat differently. While no one yet knows the ultimate outcome and ACA’s fate, we believe it is best to begin planning for what could (and likely will) happen in the next 12 months—without regard for the election’s result. It is just prudent and requires a reasonable investment of effort or foresight.

For example for the year ending December 31st, 2012, ACA requires employers report the cost of employer-sponsored health coverage on Form W-2.But it will not yet be taxable to the employee. (This is only one of nearly 4 pages of ACA summary regulations published by the IRS alone.) You are likely going to have to do W-2 reporting without regard to who wins in November, for no politician will be able to resist knowing the future tax-revenue potential of this currently hidden benefit and substantial chunk of untaxed employee compensation.

In April, we suggested that employers appoint a company Executive-in-Charge (EIC) for employee health-care coverage and change. We recommended the EIC be appointed promptly and the CEO and Board be briefed by the EIC in the 3rd and 4th Quarters regarding what compliance efforts (e.g., W-2’s) and healthcare market planning are required and prudent. [For more on the proposed role of the EIC you may reread our April 2012 E-Notes]

This action may be more important today, than when we wrote it in April. The more we research ACA the clearer it becomes that there is no single prescription for what an employer must do to comply with the law and assure the best outcome for the employer and its employees. This is generally true because: 1.) Provisions of the law & IRS code cleverly parse and segment employers and their requirements, and 2.) The unique economics or demographics of each company may require very different responses. Hence, your compliance & health coverage (short- and long-term) action plans will be quite specific and uniquely tailored to your needs.

One size will likely not fit all, and work will be needed to investigate options. Appointing your Executive-in-Charge is the first step in making informed decisions and getting best control of future employee healthcare costs.

And if Washington decides to throw out ACA (as written) on December 1st, you have not expended much effort and will surely know a lot more about what it will take to successfully operate in future employee-healthcare insurance markets. You will also have taken a step to show your employees the company is taking action on their behalf in these “unsettling” times—that in itself is an added employee benefit.

Wilkening & Company E-Notes previous articles on the Affordable Care Act—    April 2012          June 2011    August 2010       June 2010

If you do not have an executive assigned to ACA for your company, I suggest you appoint one. If you are the CEO and you figure that is your job, do not underestimate the time you will need to spend on this time-consuming and complicated task.

And whether agree with our 2012 approach to ACA or not, spend the time to become knowledgeable of the issues and prepared to act before year end.

Wilkening & Company has assembled a respected team of tax, legal and risk-management experts to help clients navigate the uncertain waters known as ACA and to help them reach a cost effective and complaint outcome. We are trying to become a “go-to” resource in these trying & uncertain times. If you are concerned about what actions to take next, feel free to call or write Wilkening & Company at (847) 823-5090, bob@wilkeningco.com.