Paying siblings equally — a sure way to ruin your family business

You are the founder of the business, but you are also the father of two or more sons or daughters in the family business. You love them and want the best for them. As the sole shareholder, you have the right to pay them whatever you like — and you do, because it is your business.

Does this sound familiar? In a single sweep, equal pay for unequal contribution creates one of the most common grounds for failure. Second to a lack of succession planning, family member remuneration is the factor most likely to lead to long-run failure of a family business. It is a form of nepotism, and it drains the life from the company.

According to Professor Craig Aronoff of the Family Firm Institute, nepotism used correctly can benefit an organisation tremendously. Family members who grow up around the business can understand its strengths and weaknesses deeply. The damage begins when family needs overshadow the needs of the business — especially when incompetent family members are brought in purely to secure an income.

Authors Craig E. Aronoff and John L. Ward outlined practical standards for beneficial nepotism: proper education for the role; three to five years of outside experience before joining the family firm; and entry into an existing, vital position with clear expectations and performance requirements.

From those standards, fair remuneration follows naturally: a market-related salary. With education, experience, and performance requirements in place, non-family colleagues are far less likely to feel that favouritism is costing the business its future.

Incorrect use of nepotism is only one of many unique factors in family enterprise. The complexity stems from the interconnectivity of family, ownership, and business. Sound family governance is the safeguard — and the sooner a family works toward best practice, the sooner it can enjoy the success that well-run family businesses achieve worldwide.