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Being fair with family wages

Family wages

Part 2 of a 3-part series on running a family business

Determining appropriate compensation for employees is tough enough, and even more so when some or all of your employees are family members. How can you most effectively determine a "fair" salary for all your employees in a family-owned business?

To start, recognize that the intertwined topics of performance management and compensation are inherently problematic in family-owned businesses, since you're never truly "away" from your work. Whenever and wherever family employees connect in or out of the workplace — in-person, online or by phone — there's potential for questions or disagreements to arise over pay and performance.

Some of the most common questions include:

  • How should family member roles, titles and compensation be determined?
  • How should family members' performance be evaluated, especially compared with non-family members?
  • What's the most appropriate way to recognize and reward both family and non-family members?
  • Should family members be paid a "market rate" or "family rate" salary?

Compensation Guidelines

Rather than waiting for family employee questions like these to arise and potentially linger and fester, it's much better to proactively communicate your performance and compensation standards and principles to all employees. These could include some or all of the following:

  1. Treat family member performance/compensation the same as for all employees — Don't mistakenly think no one will mind if you pay family members substantially more or less than non-family members — someone will squawk. In word and deed, everything that you provide for family employees, including base pay, overtime, sick time, bonuses and benefits (including vacation time), should be equivalent. This step alone will resolve the majority of family/non-family employee compensation issues.

    The primary exception to this rule is if you employ a child under age 18. If so, consult with federal and state regulations regarding child labor laws and withholding and filing requirements.

    Lastly, if your spouse is a co-owner or owner of your business, consult with your tax advisor for recommendations regarding compensation and tax-related filing requirements.

  2. Limit "compensation" to wages/benefits only — Related to the equivalency recommendation above, define employee "compensation" as wages/benefits only. Employee perks like gym/club memberships, free food and company freebies are great, but these benefits should be provided equally to all employees and not factored into your individual compensation calculations.

  3. Use market standards to establish compensation — Base compensation levels for all roles on established industry standards, as reported in pay data surveys. Depending on your type of business, there are likely multiple sources available for salary data information, including from salary survey vendors, trade/occupation associations and federal and state employment offices.

  4. Be transparent about your compensation principles — Just as you make clear your job performance expectations, let your employees know where you stand regarding your company's compensation principles. For example, use the salary data information you've collected to establish and communicate to employees what you deem "fair" compensation. Whether your family and non-family employees completely agree with you, they will at least know your standards.

No matter the size or type of your business, proactively establishing and communicating your compensation standards is critical to running a high-performing company. For more advice and information, visit the Business Resource Center.

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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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