How Can Owners Set Fair Compensation for Family Members Who Work in the Business?
Short answer. Set pay for family employees according to the work, responsibility, and skills required, using consistent criteria for relatives and nonfamily staff. Separate compensation for employment from returns on ownership. Document how pay is reviewed, and talk with your CPA or attorney when tax or legal treatment depends on the arrangement.
Set compensation for family employees according to the job they perform and the value and responsibility attached to it. Ownership and family status should not determine an employee's salary. In my experience, clear standards reduce resentment and help the company explain why different roles receive different pay.
Separate Pay for Work From Ownership Returns
A relative who works in the business is being paid for a job. A relative who owns shares has an ownership interest. Keep those arrangements distinct in the company's records and discussions. If the business makes distributions to owners, use the ownership rules that apply to all shareholders. Do not use salary to quietly compensate one relative for owning shares or to make up for differences in family wealth.
Write down the role, responsibilities, reporting line, and expected results for each family employee. Compare the work to similar roles in the business and use consistent criteria when setting compensation. The pay structure should reflect the scope of the job, the skills needed, and the person's experience and performance. Ask your CPA or attorney about tax, employment, and documentation requirements for the company's specific arrangement.
Use a Consistent Review Process
Decide who recommends and approves compensation for family employees. When possible, keep the person's direct supervisor involved and have another owner, director, or committee review the decision. This can reduce the effect of family relationships on pay decisions. Use the same approach for nonfamily employees in comparable roles, and record the basis for changes.
Review compensation at a defined interval and when responsibilities materially change. Consider the job's scope and results, not personal expenses or the person's expected inheritance. If a family employee receives incentive compensation, state how it is earned and how performance will be measured. Ensure the plan rewards outcomes the employee can influence and does not encourage decisions that harm the company over time.
Explain the Policy and Address Concerns
Make the policy understandable to owners and employees. You do not need to disclose every individual's pay to the entire family, but the principles and approval process should be clear. Employees should know where to raise concerns about inconsistent treatment. Owners should know how compensation decisions are reviewed and how conflicts of interest are handled.
When a relative's pay is disputed, return to the role description, evidence of performance, and the company's policy. Avoid negotiating compensation during unrelated family disagreements. If the issue involves distributions to shareholders, address it through the ownership and dividend process instead. Related guidance includes how to handle pay for nonworking owners, preventing disputes about unequal pay, setting dividend rules, and governance for balancing family and business interests.
Many junior to mid-level professionals inside a single family office are paid $50,000 to $125,000 in annual salary.
Sources: The Single Family Office. Informational only, not financial, legal or tax advice.