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Creative Compensation in a Family Business

Updated: Oct 4, 2023

“My sister wants to hike her pay up to $300K per year. That’s insane,” opened 3rd generation family member, Claudio, on our Zoom call.

“I want to talk about how we pay ourselves,” he continued. “My sister, my cousins and I are all in our 30s and we earn the same even though we do different work. One cousin is GM of our largest division, and my sister is a Project Manager in that division. It makes no sense that we’d all earn $300K per year, but she just bought this big house, and the business had a good year last year, so…. What’s the right way to pay ourselves?”

Equal Pay or Market Pay – How do you choose?

Compensation in a family business is an apt illustration of the paradox of leadership in a family business.

When deciding how to set compensation, family business leaders usually use one of two mindsets. The Business Mindset says to pay market wages for each role in the business. The Family Mindset says to pay family members the same regardless of job title.

Reconciling these competing impulses makes leadership in a family business uniquely vexing because there’s validity to both mindsets.

The Family Mindset is driven by love and values sharing, equality, and unconditional belonging. Leaders using the Family Mindset might pay all family members the same. “We’re all family, right?”

In contrast, the Business Mindset is driven by power and values profits, competition, and meritocracy. Leaders using the Business Mindset might pay family members the same as any non-family employee would be paid for the role. “That’s how businesses should operate, right?”

Paying equal wages to family members seems like a fair expression of family unity but can conflict with the practical demands of business efficiency. Paying market wages to family members seems like a fair expression of meritocracy but ignores the unique opportunities afforded to family members in a family business.

Even messier is when some members of the family insist on equal pay, and other members insist on market pay, leading to endless, futile arguments. Families get stuck because they use either/or thinking in the face a polarity or paradox. It's “right” to follow the norms of the family. It’s “right” to follow the norms of the business.

How do you choose between two rights when they are in opposition?

Finding The Both/And

There’s no “one right answer” to a polarity because polarities form a dynamic interplay between two seemingly opposing but equally valid viewpoints. Rather than choosing one mindset over the other, family business leaders reconcile conflict by seeking creative solutions that harmonize both perspectives.

It’s not hard to do, once you shift your mindset from “either/or” to “both/and.”

Instead of asking whether to pay either the same or pay market rates, change the question. Ask “how can we get both the benefits of equal pay and the benefits of market pay?” Then get creative.

Managing polarities necessitates nuanced innovation that respects the strengths of both mindsets while navigating the potential pitfalls of each on its own. Instead of choosing market pay or equal pay, think through the benefits and overuses of each, then craft a third way that harnesses as many of the benefits of both, while minimizing the downsides of each.

No One Right Way

Here are some examples of how to harmonize these two mindsets:

  • Pay market-based salary and equal bonus to family members.

  • Pay equal base salary and base bonus on performance.

  • Pay market-based salary and equal stipend for family-related obligations (such as attending family meetings).

  • Pay equal base salary and issue a variable stipend for family-related obligations (such as chairing the Family Council or leading the family foundation).

  • Pay market-based salary and equalize perks such as company cars, gym memberships, stock grants and tax preparation services.

You get the idea. There are many ways to design compensation that accrue the benefits of both the

Family Mindset and the Business Mindset.

Compensation in a Family Business

Since all family businesses are different, compensation in a family business is based on each one’s specific context. And since polarities are dynamic, whatever comp design works today may need to change when the context changes.

After all, the heart of a family business beats with the rhythm of both family and business. Acknowledging this complexity is key to thriving in the face of paradox.

I’m so passionate about polarities in family businesses that I’ve written a book about them! (Publishing date: July, 2024.). Join my mailing list to receive communications about how to leverage polarities to help your family business thrive.

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1 Comment

Nov 04, 2023

Cathy, I like this article, thank you for sharing. It's a real-life example and the solutions presented are viable, hopefully the family was able to move forward with one of them. What comes to mind for me is that with this solution, the family system is shifting. Up until now, it served one purpose, and with this compensation change, the purpose of the family system evolves from what the founder intended to what the next generation needs for family business continuity. I very real scenario.

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