You’re the founder of the business, but you’re also the father of two or more sons or daughters in the family business. You love them and want the best for them. You want to provide the life that you never had. As the sole shareholder, you have the right to pay them whatever you like, and you do, because it’s your business. And what will the non-family employees think? “It is none of their business,” you say.
Does this sound like a conversation you’ve had in your family business? What if I tell you that in a single sweep, you have created 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 the failure of a family business in the long run. It’s a form of nepotism (favouritism for family members) and it drains the life from your company.
According to Professor Craig Aranoff (a fellow of the Family Firm Institute, Boston), nepotism, if used correctly could benefit an organisation tremendously. Employing family members could bolster or increase many of the qualities of the founder that made the organisation successful in the first place. Additionally, children that grow up in the business environment have an immediate feel for the business and have a deep understanding for the strengths and weaknesses of the organisation. They can hit the road running, as they say.
The negative aspects of nepotism rise to the surface when family needs start to overshadow the needs of the business. This could happen when incompetent family members are brought into the business purely to fill their needs of an income. The non-family members will immediately feel that the family’s actions have come at a cost to the business and in turn, their futures. The incompetent member could even implement measures that drive the company to the ground.
Authors, Craig E. Aronoff and John L. Ward, outlined “Rules for Nepotism” in their book, Nation’s Business. Within these rules, they outline three standards that family members must adhere to in order for nepotism to be beneficial to the family:
- Proper education for the specific job function.
- Outside experience of 3-5 years before entering the family business.
- Entering the business in an existing and vital position with clear expectations and performance requirements.
From these standards one can easily infer what the answer would be to fair remuneration for the family member. A market related salary is the obvious answer and because of the education, experience and the performance requirement, no non-family member would ever feel that the family member is being favoured.
The incorrect use of nepotism is just one of the many unique factors that need to be considered when building a family business. The complexity in a family business stems from the interconnectivity of family, ownership and the business. Sound family governance is the only way to safe-guard a family business against these common mistakes and the sooner your family starts working towards best practice, the sooner you could realise the enormous success that well-run family businesses enjoy worldwide.
The Family Firm Institute (FFI) has over 1800 members world-wide, specialising in family business consulting. The members utilise over 20 years of specialised family business research to support their work and their interventions in this very complex environment. Kevin Howell is a member of FFI, has over 22 years’ experience in family businesses and now runs a consultancy in South Africa that helps family businesses prevent text book mistakes from affecting the growth of their business.