How much should I pay my children?

From a reader:  My father started a manufacturing business (home construction) in the 1970s. After college, my two brothers and I immediately went to work for him.

We got low salaries. Sometimes we were not even paid at all. Our parents provided for everything. When we got married, we were each given a townhouse. Our father paid for our children’s tuition, our trips abroad etc.

Most of our classmates also worked for their parents for little pay. That’s the way things were back then.

I tell my kids how lucky they are now. Our business has grown. Our parents expect our kids to also work for us.

My son and my nephew are currently working for banks. They are set to leave, but they want more than P100,000 a month if they will join us. We, the second generation, are not getting much (we depend on bonuses). Two nonfamily managers have been with us for years, and get good pay. They are worth it.

My brothers and I are not sure if we can afford what the boys want, or if they are worth it. Both had average grades in school, though my son has a higher bank salary than my nephew. They both want the same pay now.  Should we pay them equally?

The other grandkids (in high school and college) will wait and see. For what? Our parents are not getting any younger.

My reply

Look for benchmarks in the industry regarding market rates for professionals based on the responsibilities the two boys are expected to take on.

Since you are in manufacturing (not banking), benchmark with manufacturing (not banking). Many families pay all third generation equally, for fear they might compare salaries (frankly, they would), but if you want to professionalize your enterprise, then pay each based on what his role requires—and on how he performs. To minimize conflict, make clear to each of them the basis of his salary, and how he will be assessed for pay increases later on.

You wonder what the rest of the younger generation are waiting for? They want to know if the two boys will be happy working with you. Is the pay sufficient? How about work hours, duties and so on?  Start succession correctly now, with the first two grandkids.

Because of the government’s “Build, Build, Build” program, I assume that your business has a bright future. Tell the boys about—or better still, have them research on—the future of your business, the prospects of which might be brighter than staying in finance.

Your company can likely afford market rates for the two boys, if you think creatively. Depending on your company situation (including liquidity), you can give them a mixture of salaries, bonuses, incentives, benefits, dividends (give them shares if you see fit). Pay them fairly (based on what they would be getting from similar firms) but expect commensurate performance.

After benchmarking, you might discover that the boys would be getting a higher pay than you. I am glad that your nonfamily executives are paid well, so I don’t think you would mind, but you and your siblings can of course tell the boys about the difference in your pay grades.  At the same time, stress that they are expected to perform well.

I am concerned not about the boys’ pay, but your lack of faith in their prospective performance. Even if they did not do well in school, hopefully they have matured. Ensure that the boys work effectively, with no entitlement attitude, and if possible, even exceed—what other nonfamily employees do.

Since they will be future owners, they need to think like owners, not just employees. Give your trustworthy long-time managers the authority to train and assess them. Tell the boys to do their best in the business, and to show that they are worthy of their market-rate pay—and everyone’s respect.