How Much Should I Pay Family As Employees?

Determining how to pay your children, nieces/nephews, cousins, siblings, uncles, parents, etc can be a complex endeavor, but it also can be simple and straightforward.

Dan Schneider; a succession planner with The Rawls Group is filling in for Dr. Merlot to answer questions he has received from family business owners across the country.

Before we get started, you may be wondering who is this Dr. Merlot Dude? The Doc is the straight-talking alter ego of Loyd Rawls, who is the founder of The Rawls Group. An alter ego may seem a little silly, but it falls right in alignment with one of Dan Schneider’s favorite motto’s of Do Good, Have Fun and Make Money. So in the spirit of doing good and having fun, we interact with a fictitious alter ego, “Dr. Merlot,” Click to learn more about Dr. Merlot and Alter Ego’s.

Now, let’s dig into the question of How Much Should I Pay Family Employees?

Dr. Merlot’s Perspective:

The answer to this question has several facets. I understand there is a need to support a standard of living for family member employees (FME) but, I do not recommend you pay a family member any more than you would a common-law employee under comparable circumstances. There are no secrets within a business. Your long-standing, hard-working, dedicated employees will find out if a family member is being overpaid and resent them for their privileged position.

Dan Schneider’s Insight:

One way to help carry this out includes creating a salary band or salary range for the positions in your organization. This gives you an opportunity. By doing that, you can take into consideration any outside experience your child or children may have gained as an employee of someone else’s company. If they don’t have outside experience, then you can pay them in the bottom quartile of the position’s pay range. When (and If) their performance merits additional pay, then – and only then – give them a raise. If they are in a sales position, use the same pay plan you use for other salespeople.

Dr. Merlot’s Perspective:

Your kids have formidable challenges just doing their job and earning the respect of employees. Don’t magnify this challenge by setting them up for resentment. Furthermore, you are hindering the development of competent, capable, and committed successors, if you pay extra for ordinary. Hopefully, your children want to be extraordinary and are motivated to work for the pay they deserve. Therefore, pay ordinary for ordinary and make a big deal of any additional compensation merited as public recognition for the extraordinary. If they are unable financially to live the lifestyle you want for them, give them a gift, but do not let them think they are entitled to extra pay, simply because they are a family member.

Dan Schneider’s Insight:

Gifting is a good way to supplement your kids’ earnings. The amount you gift on an annual basis may change as a result of the 2020 elections; so stay current with the tax regulations to maximize the impact of your gift. You might also want to remember that lifestyle is a choice, and there is certainly nothing wrong with letting them realize that one of the keys to independence is financial freedom

Dr. Merlot’s Perspective:

There is a difference between a family member employee (FME) and a successor candidate, which is important to understand related to developing pay plans. An FME considers employment in the family’s business as just a job, with favorable surroundings. They do what is expected of them, show up on time, but their job isn’t the center of their life and will not try to exceed expectations. An FME will try to make as much money as they can with limits to the hours they devote or the amount of stress they endure to earn a little extra income. They may also have a short suit in judgment, interpersonal skills, or critical thinking ability.

Dan Schneider’s Insight:

Generally, Dr. Merlot’s views on family member employees – as opposed to family member successors – are on point. Some family members, even if they do have the talent, simply don’t want the responsibility that comes with the “successor” role. So, it makes life easier for everyone to pay them – the family member employees – at a market rate for the position they’re filling. At a later point in life, the successor role could have more appeal to them; and if it does, and if they have the talent, then their compensation should be reconsidered.

Dr. Merlot’s Perspective:

On the other hand, a successor candidate considers employment in the family business an opportunity to make their mark in the world and perpetuate a family legacy. They arrive early and stay late to earn the respect of their coworkers and they are not satisfied unless they are exceeding expectations. Money, titles, and recognition are important to them and they generally portray an attitude of “Just put me in the game coach! I don’t care what position I play.” Most importantly, they have demonstrated as an FME for several years, they have the potential enthusiasm, work ethic, humility, judgment, and interpersonal skills to be a successor.

Dan Schneider’s Insight:

Dr. Merlot is highlighting the difference between people who see what they do as a means to living and people who see what they do as a way of life. The latter group includes the cream of the crop; and they usually make the grade as successor candidates or as non-family members who could easily become part of a “succession bridge” while the family member successors are learning the behaviors, attitudes, skills, knowledge, and experience to become leaders in their own right.

Dr. Merlot’s Perspective:

When you have confirmed a successor candidate, you should pay them for both the job they are doing and for the effort expended to become a qualified successor. Once they’ve earned respect from employees and managers, provide a financial supplement for the extra effort they will have to devote to learning how to be a manager and a leader. At this point, their attitude is not in question, they have earned respect, and you are not concerned about the opinions of employees or managers when your SC drives up in a new car or begins to demonstrate a more expensive lifestyle. In fact, at this point, the confidence you show in them every day sends a strong message to long-standing employees and managers. This signals they should join the party, or be at risk when it comes to facing their new future manager and leader of the business. This management party consists of those participating in the training, encouragement, coaching, and mentoring to develop a qualified successor.