It is crucial to pay partners and employees appropriately for the positions they hold and the duties they carry out.
Unfair remuneration can destroy relationships, especially in a family business. Here are three true stories to illustrate the point; only the names and places have been changed.
Case 1: No dividends
In a small town is a thriving, integrated beef and meat processing business. The founder died recently but did a great job of succession planning, and his son James was prepared to take over the business.
The founder’s wife is well cared for; the rest of the estate was divided equally between James and his two siblings.
I met James at a family business seminar recently, where he strongly disagreed with the presenter about remuneration practices in family businesses. The presenter had said that owners of a profitable business were always entitled to dividends and growth in share value.
“I disagree,” said James. “I work full- time in this business. Why should I share the profits and growth in value with my sister and brother, who have nothing to do with it? I’m not going to pay dividends.”
Later, James told me that he and his siblings were no longer on speaking terms.
- Lesson: Owners of profitable businesses, whether individuals or legal entities, should be paid an annual dividend. This is normally an agreed-upon fixed percentage of the annual profit.
Case 2: no fee
Close to Cape Town is a roadside complex, an attractive sprawl of craft shops, restaurants, accommodation, a tourist information bureau, museums and bookshops.
It is the creation of Cecil, the owner of the adjacent farm. With four strong-willed daughters, he foresaw difficulties developing with ownership succession, so he placed the business in a trust, inviting two professional business colleagues to serve as independent trustees.
Three of the girls are now married and, despite Cecil’s wise move in establishing a trust, there is growing dissension among family members.
“Why is this happening when the trust was set up specifically to help Cecil avoid problems?” I asked the trustees.
“While Cecil often seeks our professional advice over the phone, despite our best efforts he has kept us completely in the dark,” they explained. “He has never set up a meeting. What’s more, we’ve never been paid a cent for our involvement.”
- Lesson: A director or trustee, whether owner, family member or manager in the business, should be paid a market-related fee, comprising a monthly retainer and a meeting attendance fee, based on the size and complexity of the business.
Case 3: no equality
Gawie had three sons, but only Johan, the middle son, showed an interest in the citrus farm.
While the boys were at university, the profitability of the farm deteriorated as the price for yellow grapefruit declined. When Johan joined his father he was paid a bare minimum, far less than he would have earned as a manager elsewhere, but he worked hard and proved to be astute, borrowing wisely and planting new varieties. Within five years the future of the business looked bright.
Johan then discovered that his father’s will had divided his entire estate equally among his three sons. He was furious, and left the farm to work elsewhere, destroying any prospect of keeping the business in the family.
- Lesson: Managers, whether owners, family members, directors or trustees, must receive a competitive, market-related remuneration package comprising a salary and perks such as medical aid, pension and others, depending on the job and industry practice. Family businesses seem to do it again and again: they confuse ownership, directorship and management roles and don’t pay each fairly. Beware, this is a potential killer of a family business.
Peter Hughes is a business and management consultant with 30 years’ farming experience.