How to Pay Your Family Employees

Working every day with family may seem like an ideal situation for a small business; sharing the ups and downs can bring a family together and strengthen both the relationships and the business. But a family-owned business also can cause conflict and strife, either with non-family employees or inside the family itself. While there is a fairly substantial list of sticking points when it comes to managing a family affair, payment and compensation may be right at the top. Here’s some advice on how to handle payday when there’s family involved.

Put It in Writing
Compensation is one of the greatest causes of conflict in family-owned companies, says James Lea, an independent family business advisor, author, speaker and professor of family medicine at the University of North Carolina at Chapel Hill.

“Difficulties begin to arise when family members join the business, which usually begins as an entrepreneurial effort—one person starting a company—and then other family members join in or are invited to, or kids grow up and come in,” he says. “What happens is that the organization tends to grow like mushrooms out of the forest floor without any real structure, without a lot of forward thinking and certainly without the kinds of procedures and policies and so forth that should be in place to guide any business organization.”

It is particularly difficult when family members work together in the absence of formal compensation policies because everybody has his or her own expectations and nobody really has limits or parameters in which those expectations can be either met or corrected, Lea says. When family members work for you, he says, the first thing you must do is ask yourself, “What am I going to pay him, how am I going to pay him, how is he going to be compensated, is he going to work as an hourly worker, or as a salaried employee? What about benefits packages?”

“Salary and compensation is a central issue in family companies that needs to be taken care of by having written policies and procedures in place,” he says.

Create written employee policies that are clear to any family member who comes into the business, Lea says. “‘These are the hiring policies, you’re my brother-in-law, you’re a family member, but you understand that this company has to treat all employees pretty much the same,’” Lea suggests you say to your family members when they begin work. “The first discussion needs to have at least one sheet of paper on the table, between these two people. ‘This is what we do, here are the benefits we offer and here you get considered for promotion under these circumstances, along this timeline, etc.’ It can be generous, but I think it should be fair, and I think it should be equitable among employees and [the relative] just needs to know it right up front.”

Your policies and procedures don’t need to be complex, though, Lea says. “They don’t have to be fancy, they don’t have to be leather-bound, but they have to be written down, clear and reflect the intention of the owner,” he says. “And they have to be available for review by the people that are going to be affected by them.”

Job descriptions are something many family companies, especially fairly young enterprises in growth mode, don’t stop to consider, according to Lea. Again, here is another example, he says, where a formal, detailed document describing positions at a firm can help lessen any potential strife. “Where there’s no real form or structure, no touchstones, you’re asking for chaos and conflict, and sometimes the destruction of the business,” he says.

Check the Job Market
Lea suggests checking the competitive base salary in the marketplace for a particular position. If you are a member of any trade organizations, those associations generally have that data available for your area, he says. Government Web sites, such as the U.S. Department of Labor, also house a considerable amount of data on the subject. “That, I think, is a pretty fair guideline for family members coming in or any employee,” he says.

Be Clear, Equitable
Changing business practices on your employees/family members, especially when the company is growing quickly and more family members are coming to work for you, can result in confusion for all. “People look around and say, ‘Hey, wait a minute, we haven’t done it that way before, [and] we’ve been doing alright, haven’t we?’” Lea says. “Then it becomes a real test of will or leadership on the part of the senior person at the business to say, ‘We’ve been doing OK, but this company continues to grow and we’ve just got to be businesslike in how we run it. And so these [policies] need to go into place.’”

In companies where employees are a mix of family and non-family workers, care must be taken not to alienate or otherwise damage the morale of the non-family team members. Some of your workers will be able to ignore the perceived special treatment of your brother-in-law, for example, while others will be resentful of carrying their share of the work and his as well. And Lea says that is understandable. Following a policy of equitability and treating everyone fairly will help to avert that kind of situation, he adds.

“Transparency is not an altogether bad thing either,” he says. “Let everybody know how management decisions are made: You don’t call for a vote because that’s the responsibility of the people in charge, but it’s good letting people know how decisions are made, particularly letting people know that everybody’s interests are being considered equally in making management choices. Even if people disagree with it, they tend to respect it and will support it.”