Worth their salt

By Caro U. Rock

The word “salary” comes from the Latin word salerium, a payment made in salt. In ancient times, salt was a valuable commodity, used not only for seasoning but also to preserve food. According to Roman historian Pliny the Elder, soldiers were paid in salt, hence the term “worth one’s salt.” Pay scales presumably were set by the Emperor of Rome.

In family businesses today, however, the subject of compensation is peppered with questions of equality, fairness and paternalism. Emotions run high. The risk of damaging family harmony can make this subject “the elephant in the living room,” one of the most sensitive issues.

According to my father-in-law, Milton L. Rock—patriarch of our family business and former managing director of the Hay Group, a consulting firm that specializes in compensation practices—a family business should be run as much like a public corporation as possible. Employees, including family members, should be rewarded based on their performance and accountabilities. Problems arise when family employees feel a sense of entitlement as owners, or when those who are not working in the business feel it is their inheritance. This can lead to family conflicts and claims of inequality. Fair is not always equal.

However, Milt allows that outside the core compensation objectives of the business, family members may want to have extra compensation that will enable them to contribute to, or maintain a position in, the community. This extra payment may come in the form of dividends or profit sharing. When the business is small, Milt explains, one can exert more family influence over how much should be reinvested and how much can be paid out. His experience shows that there is a life cycle for family businesses. When the business is just beginning, the family is willing to take less pay, just as in periods of economic downturns, the family should take the hit first.

When it comes time for the next generation to enter the business, my husband, Bob—who sits on a number of boards of family-owned and family-controlled businesses—advocates bringing in a professional to help develop the compensation philosophy, which the entire family should sign off on. From there, compensation programs can be devised with individual pay moving up or down based on performance evaluations. Defining the rules ahead of time is essential and can save much aggravation.

In The Family Business Compensation Handbook, family business adviser Robert H. Brockhaus concurs that family salaries should be based on responsibilities, abilities and performance levels equal to those of non-family executives. Compensation should not be based on need; a distinction should be made between relatives who do not work in the business and those who do. It is wise to call a gift a gift and not pay, according to experts Stephen L. McClure and Paul L. Sessions. Separating salary from gifts signals that pay must be earned. Family members must earn their keep—to achieve success, to gain confidence and, especially, to feel worth their salt!