All business has its challenges. Due to their close-knit nature, family-owned businesses have unique challenges. Since employees are often related to each other, developing and maintaining fair & appropriate compensation plans can be difficult. Additionally, COVID-19 has presented challenges for all organizations, including family-owned business. In this Astronology®, we will review some compensation challenges that family-owned businesses face.
Unique Compensation Advantages and Challenges for Family-Owned Businesses
The tight-knit environment that naturally develops in a family-owned business is a great advantage for organizations looking for long-term investment from their workers. The natural dedication to family and the drive to see success leads to strong company culture. Another advantage that family-owned businesses have is the freedom to design and structure their compensation programs any way they would like (within legal constraints, of course!). In contrast, public corporations must consider their institutional advisers and investors when developing their compensation plans.
David Seitz, a Dallas Managing Director at Pearl Meyer, mentioned in an article for Family Business Magazine that the pay programs for family-owned businesses tend to have niche features. Some of those unique features can include
- Deferred compensation plans
- Long-term incentive plans based on economic drivers
With the good there also often is some form of drawback. For family-owned businesses, some challenges in compensation can include informal pay governance processes. Another challenge can be an unclear understanding of the business’ compensation plan. Lack of clarity on these topics can result in pay discussions becoming more personal and combative. It also can result in family businesses gaining minimal return on investment from their compensation plans. An additional challenge can include a lack of knowledge of external market value. While family-owned businesses anticipate familial loyalty, they cannot ignore their competitors’ business practices…as doing so can lead to turnover.
One simple solution to these challenges is having a third-party expert assist in developing a compensation plan that fits the family business model. Another is making the compensation strategy realistic. Ensuring adequate communication of the compensation plan also will limit interpersonal dilemmas.
Family Business Compensation: Modern Challenges in 2020
None of us can escape COVID-19’s impact. All businesses are dealing with some sort of fall out due to COVID-19. The fight to survive and thrive under today’s conditions has been tough for all. Businesses are facing the challenge of conserving funds yet still maintaining talent. Some practical steps to effectively walk this balancing act in family businesses are mentioned in an article from Family Business Magazine:
- Reduce, defer, or eliminated shareholder distributions: Shareholder distributions are the easiest short-term liability to reduce. This will mean awkward conversations with family members, some whom may depend on such distributions for their livelihood.
- Manage existing debt: Try to renegotiate, stretch, or temporarily stop paying liabilities. Businesses should review what requires immediate payment and what can be deferred while we wait for things to stabilize. Keep note, deferment on payment is a short-term solution since debts remaining unpaid for a considerable amount of time can result in a bankruptcy filing.
- Reduce workforce expenses: For some markets, shutdowns for multiple months has resulted in a need for payroll cuts. This can include reducing salaries, eliminating non-essential positions, or furloughing entire shifts or departments, with the expectation and hope to rehire these individuals as conditions improve. Consider reducing the payroll of above-market compensation of family members and / or cutting non-essential positions staffed with family members, to run a more scaled-back operation. Keep in mind, prior to layoff, seek counsel to avoid incurring unnecessary charges triggered under the WARN Act.
- Look into existing and new lending options: By creating a 13-week cash flow analysis, family businesses should be able to determine their cash needs. If those cash needs are beyond what is generated from operations, take advantage of a lending program. The Small Business Association (SBA) has several programs to help organizations endure COVID-19. Programs include
- The Paycheck Protection Program
- The Economic Injury Disaster Loan
- The SBA Express Bridge Loan
- The SBA Debt Relief Program
Although overwhelming, family businesses must take tough action now to avoid even more intense trials in the future.
Are you part of a family-run business? How has your business weathered COVID-19? Please share your thoughts in the comment box below.