Rewarding & retaining non-family executives in a family-owned business
Discussions and analyses of compensation or reward practices within a family-owned and operated business often focus solely on family members—really not a revelation nor a surprise. This narrow focus can create difficulty and a challenge as the firm begins to grow. This typically happens when the hiring of non-family executives increasingly (and suddenly) becomes part of top company leadership discussions. Hence, the pay game suddenly can change.
Why are family-owned and operated businesses often challenged when non-family executives begin to appear on the horizon? In our experience two factors explain this.
- Owner and partner pay practices in family-owned and operated businesses are often different and unique. These unique practices may include such factors as: pay premiums for family members, a reliance on owner’s cash distributions in lieu of “normal” salary or bonuses (“who needs a bonus when I get money as an owner?”) and pay levels based upon ownership stake or family generation rather than job or contribution. In such an environment, fair or market-based executive pay may have little meaning. But if you are hiring a new non-family CEO or promoting an insider, fair pay means nearly everything to them.
- Members of senior leadership in a family business are generally all (and substantial) shareholders and owners. Conversely, that new non-family CEO or EVP you are looking to hire will likely not be a shareholder. Now, shareholders generally have a pretty good feeling for how their actions and those of other leaders/owners will impact future company value and return (i.e.: their stock). But, if the new CEO or EVP is not an owner, that fabric of “pay” and performance can change.
Does any of the above sound familiar? If so, let me suggest that you and your company take some simple and proven steps to assure that key non-family executives are attracted to your company, are properly rewarded for their efforts and that these key players (and non-owners) are highly motivated to remain with the company well into the future. We suggest that you take two steps if you have not already done so.
- Find out what it will take to adequately and fairly reward top non-family employees. Do this by “pricing” or comparing your positions versus similar positions and similar companies within the market place. The investigation will typically include both salary and annual bonus. Methodologies and information for such analysis are both available and generally well known. (If you find that is not true in your case, call me. I will direct you to the right techniques and “books.”) Plus, you should also consider the competiveness of the benefits you offer. In our opinion, you want to assure the company is paying at or above the market for similar executive talent. Beware of findings that suggest that you are underpaying. That is potentially a risky situation.
As you read this, I presume you are only thinking in terms of non-family employees & executives. Actually, the objective process that I have briefly described above is exactly what you should also be doing with all of your family employees, as well.
- Next, find out what other companies & competitors are doing to retain & reward their key executives for the long term—in addition to competitive pay. In our experience, the most oft-used and mentioned tools will typically fall under the broad description of long-term incentives (LTI’s) offered to encourage outside executives to act like owners. These can include such plans as: stock options, phantom stock, stock appreciation rights or other performance-based cash awards. Now I used the term “stock” three times above, but these arrangements seldom (if ever) involve actual private-company stock—just something that acts like it. The trick is to offer rewards to executives that will be determined (or valued) and paid a number of years into the future. The value of such payouts will generally be established by: 1) increasing enterprise value, 2) the executive staying with the company in an increasingly productive role, 3) some other performance benchmarks or events, or 4) all (or some) of the above. It is also important that the company assure that these rewards are competitive and fair in the eyes of the receiving executive.
While we have found that both steps are valuable, often clients will address the broader issue of market competiveness first. This is a prudent starting point.
As your firm considers the hiring of top executive talent, know that you are competing in the marketplace with firms that may be larger, sophisticated, savvy, and may be publically-traded. They will use whatever tools are necessary to win. This will include the “right” annual pay package and perhaps long-term executive incentives.
Do not get surprised by a letter of resignation, or by a prospective CEO or EVP who turns down your offer and goes to a competitor. Prepare to compete—and win.