How much is a job worth? Should the vice president of sales receive the same compensation as the vice president of finance? What about the CEO? How much more is his job worth?
The issues are complex, and if not handled well can lead to major problems in a company. But when the business is family owned, the issues become even more complex, says Don McDermott, of DG McDermott Associates in Red Bank, an expert in developing compensation programs that support a company’s business strategy.
McDermott will speak on “What is Your Compensation Strategy?” at the Farleigh Dickenson University Family Business Forum, on Tuesday, October 2, at 8:30 a.m. at the university’s Rothman Institute of Entrepreneurial Studies in Madison. For more information call 973-443-8880. The event is free.
The Family Business Forum was established by the Rothman Institute in 1992 and is designed to provide family businesses with the opportunity to learn from experts about proven strategies for successfully owning and operating a family business. It also provides the opportunity to exchange ideas and share experiences.
The Family Business program has two additional events . The New Jersey Family Business of the Year Award, which will be announced at a luncheon Tuesday, October 7, at the Crystal Plaza in Livingston, and the seminar, “Back to Basics: Learning to Build on the Uniqueness of Families Who Share a Family Enterprise,” will be Thursday, October 30, at 8:30 a.m. at the Rothman Institute.
McDermott has more than 30 years as a consultant in the field of human resources and compensation, including 15 years in the corporate world at firms such as Bankers Trust Company, NL Industries, and Gulf & Western. He opened his own consulting firm in 1985 and works with boards, business owners, and senior managers in the design of their compensation and human resources programs.
His interest in compensation strategies may seem a little removed from his original career goal, though. “I was going to be a priest,” he says. He received his bachelor’s from St. Mary’s Seminary and University in Baltimore in 1964, then worked as a Vista volunteer for a few years before obtaining an MBA at Farleigh Dickenson in 1971. His background in teaching and social work led him to the field of human resources, and he found that he particularly enjoyed working in the area of wage and salary compensation.
Through his work he has served as an expert witness in compensation-related cases. He has also been a faculty member at the American Compensation Association and NYU School of Continuing Education.
Sibling rivalry. Compensation programs are an important part of the business strategy for any company, but the dynamics can become particularly complex in a family business, “where all of the ancient history of the family relationships and the personalities of the people are involved,” says McDermott.
The older the business, the more complex the problems, he adds. In second and third generation businesses succession issues, finding the job for each family member’s skills and talents, and decisions by family members to either join or leave the business can make or break a business.
“These are very real issues that family businesses face,” McDermott says. “What happens when the obvious person for the job of CEO doesn’t have the personality or talent for it? Suddenly younger brother becomes older brother’s boss. There is a subtlety that doesn’t apply in a non-family business.”
Personal feelings don’t just affect the members of the family, he adds. It can also affect the morale of non-family employees.
“Different roles in a company have different monetary value in the marketplace,” he says. For example, a CEO is seen as having more monetary value than a person in marketing. But what happens when those two positions are held by a brother and sister? “They may have founded the company together, but one is stronger in sales and one is stronger in strategic planning. Their roles have different monetary value. Who decides on the differences in their pay?” he asks.
Other forms of compensation. One method of equalizing differences can be through dividends or shares in the business. But this type of compensation, while it may solve the problems in a first generation business, can also create new ones in a second or third generation company, where family members may not actually work in the business but still feel entitled to a dividend.
An important question for the CEO to ask is, “Can the company afford it now, next year, and in five years?” says McDermott. Family members need to understand that they may not receive money every year. If the business has made less money this year, dividends may be less. “You can’t pull so much money out the business that you cripple it,” he says.
The threat of the IRS can actually help a CEO who needs to explain to family members why they are not all getting the same compensation. “If a company is audited, the IRS is going to check out the amount people are paid. They want to see that everyone is being paid a reasonable amount for the job. They will look at similar organizations and employees with like duties to make sure that the compensation is reasonable,” he says.
Equal pay, unequal work. In a family business, just as in every business, some people are more productive than others. But additional problems can arise when non-family employees see a family member who doesn’t work as hard as the rest of the employees receive equal or greater compensation. It can affect the morale of the entire company, according to McDermott.
Of course, dealing with compensation is just one side of the equation. At times a family member needs to be told he is no longer needed in the business. “It is always difficult to tell an employee they are no longer viable, but what happens when the employee is Uncle Louie?” he asks.
Outside advisors. McDermott suggests that an outside advisory board may be an excellent solution to many sticky family business situations. The board doesn’t have to be large, two or three people in many cases. It may be easier, he notes, for a family member to receive the news that he is no longer needed by the company from an outsider, rather than a family member. And because the advisory board is not made up of either family or employees it can take an objective, unemotional look at many areas of the company, not just compensation and employment.
Hiring, giving a raise, or deciding on layoffs can be extremely thorny issues when you’re going to sit down to Thanksgiving dinner with that person, says McDermott. “The bottom line is you want to preserve the family.”