A successful family business creates a workplace culture that welcomes non-family employees, treats them with respect, and provides equal advancement opportunities.
Every business faces challenges, but family businesses, in particular, face the unique challenge of motivating non-family workers who too often feel under-appreciated, ignored in company planning sessions, and overlooked for advancement into management positions.
In the spirit of forewarned is forearmed let’s examine the problem and explore the solutions.
The second-class citizen issue
“At too many family businesses, nonfamily employees feel like no matter how hard they work, they’re treading water,” says Sam Brownell, founder of Stratus Wealth Advisors in Kensington, MD (stratuswealthadvisors.com). “They feel they will always play second fiddle to the kids or the cousins or whoever it is that gets special treatment.”
Treating nonfamily workers like second-class citizens can erode profits. “People who feel like ‘outsiders’ see no point in putting in 100 percent effort,” adds Brownell. “As a result, customer service can drop off and the business can start seeing issues with inventory management and vendor relations.”
In the worst such cases, dysfunctional family dynamics can impact retention – an especially costly issue in today’s tight labor market. “People who don't feel their efforts and accomplishments are being appropriately rewarded have a motivation to look elsewhere,” warns Travis W. Harms, the leader of Mercer Capital’s Family Business Advisory Services Group (mercercapital.com). “The worst possible thing is to lose high-performing talent to a competitor.”
Business first
Family businesses thrive when they create a work environment where all employees feel at home. “Any family business that grows at any appreciable pace will very soon become dependent on people who are not family members,” explains Craig Aronoff, Chairman of The Family Business Consulting Group, Chicago (thefbcg.com). “And it behooves that company to ensure they feel included rather than excluded.”
Equal treatment for everyone stems from a vital principle:
The enterprise should be a “business first” rather than a “family first” operation.
Here are some specific steps that will help create a work environment that stimulates productivity among all employees – family members or otherwise.
Work hard at fairness
“Nonfamily employees should be treated, managed, evaluated, and compensated on the same basis as family members,” says Aronoff. “It’s also important to maintain clear distinctions within the family group as to each individual’s role, whether that be employee, supervisor, or manager. Within each of those roles, it's extremely important that there is perceived fair treatment of everyone – whether family or not.”
Prepare the next generation
“There is a temptation for the founders’ offspring to feel entitled, to become less productive than they might be, and to take the business for granted,” according to Aronoff. “The younger generation needs to understand they must constantly look for ways to improve operations and to ensure the enterprise remains relevant to its market.”
Promote for performance
“Advancing the right person to upper management can be a complicated and difficult process,” explains Aronoff. “Choosing a family member may seem to make the decision a simple one, but it's not. It’s certainly not a way to build the best possible business, nor is it the best way to help the new generation maximize their own lives and experiences.”
Successful family operations plant an early seed of responsibility. “Make clear that it’s not your genes that prepare you for a position,” advises Aronoff. “Rather, it’s your knowledge, experience, drive, and how you interact with other people. The person who gets advanced into a higher position will be the best person for the job.”
Avoid empty positions
Too often, family businesses create meaningless positions with impressive titles so members of a new generation can be brought aboard. This practice creates morale problems and saps profits.
Aronoff notes that the family member who requires career and employment help can be provided financial assistance or training opportunities outside the business structure.
Earn stripes elsewhere
“Assigning family members without adequate experience or training to management positions can create a sense of entitlement which is frustrating for everyone,” says John Joseph Paul, a Portland, Oregon-based family business consultant (familybusinesscounsel.com). “Instead, family members should prove their mettle by working at entry level positions in other, similar types of companies. This experience will give them the opportunity to learn practical skills.”
Many companies today require family members to bolster their credibility by gaining experience at another company for five years before joining the family enterprise.
Communicate family business policies
Having the right family business policies is one thing. Ensuring everyone is aware of them is another.
“It can be frustrating for nonfamily employees if they feel like their advancement opportunities within the company are limited because a family member will eventually come in and snap up a job they’ve been working toward,” warns Harms. “That’s a pretty common frustration.”
This situation can be obviated by communication. Family and nonfamily workers must understand the policies that govern promotions. “Clear guidelines on how the family is going to be treated personally and professionally must be clearly understood by everyone,” advises Brownell. “Transparency in these things can make a huge, huge difference, because everybody will know what's expected.”
Maintain clear chains of command
Too often new employees find themselves juggling contradictory directives from more than one family member. This creates operational and morale problems. In the worst-case scenarios, the frustrated worker leaves for another employer.
“Family businesses must maintain robust organizational charts that illustrate clear chains of command, so that no employee ends up reporting to multiple bosses, whether formally or informally” says Aronoff. “It is the responsibility of top-level management to create a clear system of authority.”
Distribute perks fairly
Nonfamily employees should share equally in company niceties such as paid-time-off, flexible working hours, and work-life balance initiatives. “If family members are given special perks, it is noticed by everyone,” says Aronoff. “And that can lead, again, to morale problems and a decline in commitment. While this kind of treatment will be accepted by some people, it will not be accepted by those who can provide the greatest return for your company.”
Reinvest profits
One of the most critical family issues is that of financing: Will profits be reinvested in operations or distributed to family members? “Your company might have lots of exciting investment opportunities,” explains Harms. “But if shareholders press for large dividend payments or share redemptions, the drain on funds can crowd out otherwise attractive projects. That can be very frustrating – especially for nonfamily CEOs and CFOs.”
Never mind that smart investment of profits will ultimately benefit family members. Those not intimately involved in daily operations are more likely to want immediate returns. Such conflict can become especially intense as the years go by and the family tree becomes populated with second, third, and even fourth-generation members. “The number of family members can grow substantially, and everybody wants a slice of the pie,” notes Harms.
How can this situation be avoided? Nothing so complicated has a one-size-fits-all solution, but ongoing education can help. “It’s important to make sure family shareholders understand that businesses often grow by heavily re-investing earnings,” says Harms. “A dollar distributed or used for redemptions is a dollar that’s not available to make the business succeed.”
Share your success
Equitable pay and promotions are one thing. But who benefits financially when the business becomes more valuable as a result of employee performance? Too often, the answer is only the family members who own shares of stock. Executives who lack equity also lack the ability to participate financially in the upside. That can lead them to jump ship, taking their skills to competitors.
“In my experience, frustrations by senior level employees are less about cash compensation and more about the lack of potential to share equity,” according to Harms. “Family businesses must develop some alternative means to incentivize nonfamily executives.”
What’s the solution? Just like publicly traded companies, privately held corporations have shares of stock that not only represent ownership control but also facilitate the allocation of financial rewards through share appreciation and dividends. Harms says that it’s wise to set in place a financial vehicle that channels such financial rewards to nonfamily executives through equity-like compensation while allowing family members to retain operational control.
A number of vehicles are available to accomplish this task. One of the most common is a profit-sharing plan, but there are others such as classified and phantom stock. Additionally, an Employee Stock Ownership Plan (ESOP) can channel appropriate compensation to executive and non-executive employees alike. While delving into the details of such vehicles is beyond the scope of this article, family businesses can seek further information from their attorneys and accountants.
Family businesses that follow the guidelines outlined above will ensure their entire teams maintain good morale while remaining invested in the success of the enterprise. “There are many ways to show nonfamily members that you care about their contributions,” explains Brownell. “Everyone will perform better when they understand their labor is going toward something greater than just the net worth of the family.”
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