Equal is not always fair

“Before our father died, he asked that what we siblings get should always be equal,” says Tirso (not his real name), the eldest of four siblings.  Dividends were given out equally; salaries and benefits, the same.

The catch? The siblings are not equal in terms of ability, commitment and performance. Tirso as CEO does most of the work—and most of the siblings’ jobs (COO, treasurer, sales VP).

Tirso is married with two children. One brother is single, one sister has several kids, while the other sister has a disabled child needing pricey care.

“I love my sisters, and I know why they sometimes cannot focus on work,” Tirso says. “Five kids are not easy to manage, all the more an autistic child. My sisters are good mothers, but they are not committing themselves 100 percent to the business, so I do their jobs for them.”

“My brother is the youngest, and we spoiled him. He does what I tell him to do, but he has little initiative. He does his job, period, but when I ask him to help our sisters, he complains, saying that they should do their job. So I do almost everything.”

Don’t kill the Golden Goose

In a family business, equality does not always mean fairness.  Parents tend to love their kids equally (at least they try to), and stipulate in their will or on their deathbed that earnings, compensation, and so forth be divided equally among all.

But unless everyone contributes equally to the family business, equal divisions, even with the best of intentions, will not work out in the long run.  Eventually, someone (usually the most capable family member) rebels.

Parents who insist on equal pay miss the obvious: Siblings who contribute most to the business must be happy. If they find things unfair, then they may leave the business, killing the goose that lays the golden egg for all.

Differentiate between ownership and management. Siblings as co-owners can receive equal dividends, which can be looked at as “gifts” from the family. (Having said this, I know of siblings who have decided to divide dividends unequally, depending on various factors, in what they perceive to be a fairer distribution.)

Siblings as co-managers need to be treated professionally, with pay commensurate to their performance.  This is the foremost consideration in giving out salaries and bonuses.

Take care of family concerns

Unlike in most businesses, family concerns, such as disabled children, are taken into consideration in the family business.

With the help of a family business consultant, Tirso and his siblings worked out a compensation scheme deemed fair by all.  After discussing time, effort and talent, everyone agreed that Tirso deserved a salary and bonus four times that of the others.

The siblings decided to hire professionals to do the jobs they cannot do.  The sister with five children agreed to stay home and take care of her family until the children are in elementary school.  The sister with a disabled child decided to work part-time.

Best of all, a family fund was created, to address health and education needs.  Medical care of the disabled child would be taken from this fund, as would the education expenses of the other children. (By the way, one sister was gently requested not to have any more children.)

Lest the fund be abused, all expenses would be scrutinized by all siblings before approval, and the sisters agreed, in writing, to a reasonable cap on expenses.

Ideal plan

Wayne Dyer of the Family Business Institute in the United States, says, “Like most important issues in life, there is no ‘one size fits all’ solution. Each situation must be treated differently, taking into consideration:  differing levels of commitment and involvement in the business, the percentage of family wealth tied up in the business…proper timing for gifting or wealth distribution initiatives, the financial strength of the company and its ability to support various levels of salaries or distributions.”

“In a well thought out plan, the total amount of money available for salary, bonuses, and distribution is determined by the success of the company on an annual basis.  Salaries are set at industry norms for the positions and contribution levels of different employees.  Bonuses are based on a percentage of profits.  Distributions [among co-owners] are a separate issue from salaries and bonuses and might range anywhere from 50 to 100 percent of net profit above the level for building retained earnings.”

Only when compensation is deemed fair can the family business succeed in the long run.

Next Friday: A reader matures outside the family business.

(Queena N. Lee-Chua is on the Board of Directors of Ateneo de Manila University’s Family Business Development Center.  Get her book “Successful Family Businesses” at the University Press (email [email protected].)  Email the author at [email protected].)