We’re a second generation, family owned and operated business. We have family members from this generation working in the business. All the stock has been passed to this generation. Now we have to figure out how to go forward. We have to figure out roles, responsibilities and compensation. What makes it complicated is that we have different skill levels, different personal goals regarding hours worked, and different preferences for work we do, and don’t want to take on. How do we set things up, to best compensate family members?”
The Emotional Weight of Compensation in a Family Business
At Strategy Leaders, we’ve walked in your shoes. As a family-owned consulting business ourselves, we understand the unique dynamics that come with mixing family and business. Over the years, we’ve helped family-owned SMBs transition from first to second generation, second to third, and beyond—even one client’s sixth-generation business.
Here’s what we’ve learned: compensation in a family business isn’t just about money. It’s tied to power, recognition, and respect. It’s tangled in family history, shared sacrifices, and deeply rooted expectations.
Conversations about pay often feel personal, but the truth is: fair compensation is key to sustaining the business and preserving family harmony. With thoughtful planning and open communication, you can create a system that supports both your business and your family.
From Roles to Ownership: Where Do We Start?
Let’s break this down into three key areas:
- Base compensation
- Incentive compensation
- Ownership distribution
Each piece plays a role in ensuring family members feel valued while keeping the business sustainable.
Base Compensation: Setting a Foundation of Fairness in a Family Owned Business
In any family business, it’s critical to separate family roles from business roles. Fair compensation starts with clarity:
Define Roles and Responsibilities
- Write job descriptions for every family member, just as you would for non-family employees.
- Clearly outline skills, responsibilities, and performance expectations.
- If someone holds multiple roles, break out each position for clarity.
Benchmark Salaries to the Market
Pay should reflect the work being done, not family status. Use tools like SalaryExpert.com to research market rates for each role.
Address Gaps in Performance or Growth
If someone feels underpaid, have an honest conversation about how they can grow into a higher salary. This might include:
- Taking on additional responsibilities.
- Pursuing training or certifications to build new skills.
💡 Pro Tip: Regular performance reviews—even for family members—can reduce tension and clarify expectations.
Incentive Compensation: Rewarding Contributions
Base pay provides stability, but incentives create motivation. They give family members the chance to earn more by contributing to the business’s growth.
Tie Incentives to Business Goals
Incentive plans should reflect the company’s strategic priorities. Examples include:
- Growing revenue or profit margins.
- Expanding the customer base.
- Improving operational efficiency.
Customize Incentive Plans
Every family member’s role is different, so their incentive plans should align with what they control. For example:
- A family member in sales might earn bonuses for bringing in new accounts.
- A family member in operations could earn incentives for cost reductions or process improvements.
Focus on Results, Not Effort
The value of the incentive should reflect the value of the outcome, not how hard someone worked to achieve it. Our Tip – Publish incentive plans to ensure transparency and avoid misunderstandings.
Need help designing incentive plans that align with your business goals? Let’s build a system that works for your family. Learn More
Ownership Distribution: Sharing the Long-Term Rewards
Ownership is about more than wealth—it’s about decision-making power, legacy, and the future of the business.
Create a Pool of Shares for Performance-Based Distribution
Set aside a portion of ownership to reward family members who contribute significantly to growth.
Offer Buy-In Options
Allow family members to purchase additional shares, increasing their investment in the company’s future.
Consider Non-Voting Shares
If decision-making power is a concern, issue non-voting shares or create phantom stock plans to reward contributions without shifting control.
Link Ownership to Long-Term Value
Ownership rewards should align with contributions to the business’s growth and stability. For example:
- Successfully leading a major project.
- Bringing in key clients.
- Driving revenue or profit increases.
💡 Pro Tip: Ownership plans should include clear rules for earning or purchasing shares, so there’s no ambiguity about how decisions are made.
Why Growth is Critical in a Multi-Generational Family Business
Here’s the bottom line: the business must grow to sustain everyone’s needs.
As more family members join the payroll, the financial demands increase. At the same time, earlier generations often rely on the business for retirement. If the company isn’t growing, it can’t support these competing needs—and that’s where tension often arises.
💡 At Strategy Leaders, we specialize in helping family-owned businesses identify growth opportunities and create strategies to meet financial demands across generations.
The Big Picture: Building a System That Works for Everyone
At its heart, compensation in a family business is about balance:
- Fairness for all family members working in the business.
- Incentives to motivate high performance.
- Growth to sustain the company as needs and demands increase.
It’s also about communication—clear, honest, and frequent. Family dynamics can complicate things, but the more you approach these discussions with openness and respect, the easier it will be to find solutions.
Communication is Key: Handle Tough Conversations with Care
Talking about money is never easy, especially when family history is involved. Approach these conversations with empathy and transparency:
- Be clear about expectations. Share the rationale behind compensation decisions to reduce misunderstandings.
- Invite feedback. Give family members a chance to voice concerns and ideas.
- Use outside advisors. Neutral third parties can help facilitate productive conversations and ensure decisions are objective.
💡 Pro Tip: Don’t expect to solve everything in one meeting. Tackle compensation in manageable steps, and give everyone time to adjust.
A Few Final Tips
- Don’t Go It Alone. Outside advisors can bring objectivity and help mediate tough conversations.
- Take It Step by Step. Compensation plans don’t have to be perfect right away. Give everyone time to adjust.
- Compromise With Dignity. Remember, you’re building for the future—not just solving today’s challenges.
Family businesses thrive when there’s a shared commitment to fairness, growth, and the legacy you’re creating together.
Why Strategy Leaders is the Right Partner for Your Family Business
We understand what you’re going through because we’ve been there. As a family-owned business ourselves, we’ve walked the same path—navigating roles, compensation, and legacy. With decades of experience consulting with family-owned SMBs across generations, we can help you:
- Define fair compensation plans that reduce tension.
- Create growth strategies to meet financial demands.
- Foster collaboration and harmony across generations.
Final Thoughts: Balancing Fairness and Growth
Compensation in a family business isn’t just about numbers—it’s about relationships, respect, and shared goals. With careful planning, clear communication, and a commitment to fairness, you can build a system that supports both your family and your business for generations to come.
Need help navigating family business dynamics? Let us guide you through creating a compensation plan that works for your family and your business. Schedule a Free Consultation
