2. Other Considerations

Family vs. Non-Family Executives

Another consideration for family businesses is how to compensate family members relative to non-family members. Some family businesses may undercompensate family executives because of past practice or because the executives are shareholders in the business and receive compensation through dividends or distributions. Family businesses that have undercompensated a family executive may be surprised by market compensation levels when they need to replace the executive with an external hire.

While underpaying family members does occur, CAP research with Family Business Magazine shows that the most common practice is to compensate both family and non-family executives based on the market value of their roles. In addition, most family businesses include family executives in annual incentive and long-term incentive programs. Businesses see value in having all executives participate in the same incentive plans and working toward the same goals. An exception is a family executive who is also a major shareholder; this executive may not participate in a long-term incentive plan because of sufficient alignment through ownership with long-term company goals.

Distributions and Dividends

Executives who are also shareholders may be eligible to receive distributions and/or dividends from the company. These distributions and/or dividends may be viewed by some companies as a portion of total compensation. CAP and Family Business Magazine have found that a majority of family businesses pay dividends, with typical amounts ranging from 10% to 15% of net income (Dividends will vary based on company performance and overall economic conditions.)

Shareholders at private companies can choose to pay themselves special distributions. Board and/or compensation committee members should be aware of such distributions and any impact they might have on compensation programs. For instance, a special distribution can impact company financials and potential incentive payouts for executives. In order to ensure that executives who are not shareholders are treated fairly, private companies should establish rules around distributions and other financial adjustments to incentive plan performance metrics.

Key Questions for Committee Members to Ask:

• What are the family’s long-term objectives for the business?
• What are the companies that we compete with for talent? Are public companies used for reference, and if so, are we comfortable with the rationale? How is public company data used?
• How is pay positioned relative to market?
• Does the company offer long-term incentives, and if not, should it?