For love or money or the family legacy?

Governance of the family is a serious and time-consuming responsibility. Should the participants be paid?

By Ivan Lansberg

When people in the business world speak of corporate governance, they usually mean boards of directors. More and more family business owners, however, have begun to appreciate that continuity in the business, and their ownership, requires other forums as well. Governance of the family is serious work, requiring dedication, zealous effort and, for many family members, time out from other income-earning opportunities.

The question that families often don’t ask when they create a family council, shareholder’s assembly, or family office or foundation is: How can we make sure family members will be motivated to do this important work?

Quite commonly, families organize governance structures without doing a good job of explaining to those who will participate what is expected of them and the broader purpose of their work. The family leaders may simply be setting up such structures because other successful families they admire have done it. Or they may be looking for a “quick fix”for some controversy that has erupted in the family and threatens to boil over into the business. Unless family members have a clear idea of the overall purpose of these structures, as well as specific responsibilities, their enthusiasm and commitment may soon dwindle.

Psychologists have identified two broad categories of rewards—intrinsic and extrinsic—that motivate people to do any kind of work. Intrinsic motivation refers to psychic rewards—for example, the playfulness and sheer joy in accomplishing a given task, or the deep satisfaction of fully exercising one’s skills and talents and seeing the fruits of one’s labor. Extrinsic rewards, in contrast, come from the outside. We get a bonus, a promotion, an award or a public pat on the back for a job well done that increases our stature.

Although the research literature provides some evidence that each of these approaches to motivation can be effective, one school of thought believes the two are sometimes at odds. This school might say, for example, that if you do something for the benefit of humankind, you feel good about it. But if I pay you on top of that, you may actually feel bad, perhaps because you are no longer as proud of your own selfless motives.

Another school, however, says that the two types of rewards can be additive; they reinforce each other. If you do something for the good of humankind, you will be even more motivated if you are also paid for it.

Leaders of governance forums need to keep both types of rewards in mind. A committee set up to devise rules and requirements for entry into the business, for example, will be intrinsically motivated to accomplish this work if their leaders emphasize the broader purpose: sustaining the enterprise through generations. Preservation of the legacy is a proud duty, like voting in democratic elections, and when this purpose is instilled in young family members from an early age, they are more motivated to contribute to it.

In larger, more complex enterprises, the time and resources devoted to governance may be substantial. There are more shareholders, more activities, more committees. The family leaders worry that if the participants aren’t paid, the work will be taken less seriously.

One family, owners of a $500 million enterprise, has taken this thinking to its ultimate conclusion. As a matter of principle, they pay the head of the family council the same salary as the CEO of the business. While only companies with substantial resources can afford such parity, the issue is likely to be raised in more and more family companies. It comes up in some firms, for instance, because family members on the board of directors are paid but family council members are not.

One company, in fact, is considering balancing out the pay of family directors with that of family council members. Family directors receive the same fees as outside directors in this company. Under the proposed arrangement, they would put their fees in a pot, to be divided equally with members of the family council.

This plan would convey a sense of equity and promote collaboration between the family participants on the two bodies, which must work closely together. The downside is that some people may get involved in governance not because they are motivated by the family legacy, but for the money. Since what they’re paid is likely to be relatively modest, their performance may turn out to be equally modest. You get what you pay for.

It’s important to keep in mind that in later-generation companies there may be many shareholders who aren’t exactly rich. When stock has been passed down through generations, it becomes fractionated. Many shareholders have to earn a living outside the business and can’t afford to be away from their jobs for long periods.

So the family that is considering paying people in key governance roles faces a host of questions. Should pay be based on need, with those who can show hardship from devoting time to the activity earning more? Should it be based on an “opportunity cost”—that is, should people be compensated for what they have to sacrifice in earnings as a result of their family duties? Should family members already earning salaries in the business also be paid for their work on family governance, along with those who are not?

What happens when the company pays? One family with upward of 20 actual or potential shareholders in the younger generation is wrestling with just this issue. The younger generation has organized frequent meetings in order to better appreciate their legacy and forge a common agenda for responsible future ownership. They live in different parts of the country and have had to pay for travel to meetings as well as for the services of a facilitator and other expenses. These costs are a burden for some members with modest incomes. But the group worries that if the company pays for their work, it will take away from their sense of accomplishment.

I don’t agree with the theory hat intrinsic and extrinsic motivation are always at odds. I do think families have to address the question of what mix of the two is most appropriate given their culture and their members’ needs. My own experience has been that the stronger the culture of the family, and the greater the commitment to the legacy, the easier it is to rely on intrinsic rewards to spur the work of governance.

One of the biggest mistakes many organizations make is to assume that pay is the only reward that effectively produces high motivation. Although pay is almost always important, other kinds of extrinsic rewards can be motivating as well. For example, some families make a continuing effort to celebrate the contributions of people involved in governance activities, at family functions or in the family newsletter. Frequently, they are even allowed to use corporate facilities such as guest houses or the corporate plane to attend meetings.

The organization of the family has been undervalued in the past, usually because women have handled this work while their husbands ran the company. The proper mix of incentives for this work will surely vary from family to family and must be designed to fit the culture. The important point is that motivational issues must be openly and continually addressed so that participants are assured that their efforts will be appreciated and duly rewarded.

Ivan Lansberg is an organizational psychologist and a senior partner in Lansberg Gersick & Associates LLC, in New Haven, Conn.