Although privately owned family businesses enjoy significant competitive advantages to help attract, engage and retain executive talent, family firms also face several common compensation challenges.
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Informal pay governance process:
Compensation governance in private family firms tends to be a bit more informal and less structured than in public companies. The compensation committee usually consists of family shareholders and insiders, rather than independent directors. When insiders serve on a compensation committee, executive pay discussions can be more personal and potentially contentious.
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Opaque compensation plans:
Many family companies offer unique compensation programs, but these programs are sometimes opaque and not fully understood by all stakeholders. Obscure features of the compensation plan may persist, and executives may lack a complete understanding and appreciation of the value of the total package.
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Below-market long-term incentives:
There are numerous reasons why family companies offer below-market long-term incentives. These reasons include the family's unwillingness to share equity and thus dilute both ownership and earnings. Thus, it is often unrealistic for a private family company to match the long-term incentive compensation levels offered by public companies, and the total compensation strategy must consider this shortfall.
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Absence of a total compensation strategy:
Family companies often lack a cohesive compensation strategy covering all elements of executive pay: base salary, annual incentive, long-term incentives and benefits/perquisites. The company leaders may not understand how all of the elements of pay fit together as well as the trade-offs between various elements. The family company may find itself leaning too much on the culture and goodwill of executives, believing that loyal, long-tenured executives are less concerned about compensation.
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Lack of external market knowledge:
Private family companies often lack an understanding of current market practices and norms. Small companies place less emphasis on the external labor market. They tend to promote executive talent from within the company, until that is no longer tenable. A lack of knowledge about executive compensation trends can hinder the ability to compete for talent.
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