Executive Pay In Family Business: Striking The Right Balance

As family-owned companies grow, they face increasingly complex challenges, and none may be as important as the issue of executive remuneration. Attracting and retaining top talent while ensuring that pay structures support long-term business growth is a delicate balance. How a family business handles executive pay can either accelerate leadership development and smooth generational transitions or serve as a roadblock to future success.

Advantages of Family-Owned Firms in Executive Pay

One of the distinct advantages family businesses have is the freedom to design their executive pay packages. Unlike public companies that are under constant scrutiny from shareholders, private family businesses can create tailored, long-term incentive plans. This flexibility allows remuneration to be strategically aligned with the unique goals and values of the family enterprise. There’s no pressure to follow the same "one-size-fits-all" approach often seen in public firms, where plans are often driven by external expectations rather than what’s best for the company.

Moreover, family businesses can offer executives a more stable environment when it comes to equity-related remuneration. With private stock valuations less affected by the fluctuations of the public markets, long-term incentives tied to the value of the business become more meaningful. This stability can be very appealing to senior executives who prefer a long-term view over the short-term volatility often associated with public companies or the short-term value maximisation preferred by private equity.

Perhaps one of the most underrated advantages is the culture within family businesses. The sense of legacy and long-term thinking creates a work environment that feels more personal and less political than what executives might experience in larger, more bureaucratic public firms. This positive culture often becomes a key selling point for talent looking for meaningful work and long-term loyalty.

The Challenges of Executive Pay in Family Businesses

However, there are challenges as well. One common issue is that remuneration governance can be more informal in family firms. Without the independent oversight required in public companies, discussions around executive pay can become highly personal and, at times, contentious. Many family businesses lack a structured process for setting pay levels, and the involvement of family members in these discussions can complicate matters.

In some cases, the executive remuneration packages in family firms are not as transparent as they could be. Executives may not fully understand the total value of their remuneration, particularly with regards to long-term incentives or unique features like phantom stock. This can lead to confusion and dissatisfaction, as the full picture of their rewards might not be clear.

Another significant challenge is offering competitive long-term incentives. Public companies often have deeper pockets and are more willing to share equity with senior management. Family businesses, understandably, may be reluctant to dilute ownership, which can make it harder to offer the same level of rewards. Yet, remuneration that falls short of market rates can make it difficult to attract and retain the best talent.

How to Get Executive Remuneration Right

So how can family businesses improve their approach to executive pay while playing to their strengths?

1. Formalise the Pay Governance Process: While it may be tempting to keep things informal, introducing a clearer structure to remuneration discussions can make a big difference. This might involve establishing a remuneration committee, even if it's only made up of family members, and ensuring they are equipped with up-to-date market data and best practices.
   

2. Communicate Clearly and Transparently: Make sure executives fully understand the value of their remuneration packages. The benefits of unique pay structures can only be felt if they’re appreciated. Clarity around how long-term incentive plans work is essential for aligning executive goals with those of the company.
   

3. Develop a Cohesive Remuneration Strategy: Don’t just rely on the goodwill and loyalty of long-serving executives. Family culture is important, but it doesn’t replace competitive remuneration. A well-thought-out remuneration strategy should cover base salary, annual incentives, long-term incentives, and benefits, ensuring that all elements fit together coherently.
   

4. Stay Informed About the Market: Just because a family business operates differently from its public pr private equity counterparts doesn’t mean it should ignore the market. Regular benchmarking against comparable firms, both private and public, ensures that remuneration remains competitive and relevant.

A Balanced Approach to Remuneration

In the end, family-owned companies have a unique opportunity to craft executive remuneration packages that align with their long-term vision and values. By leveraging their flexibility, offering a compelling culture, and maintaining a clear, structured approach to pay, they can attract the talent needed to secure the business's future success.

Balancing these advantages with thoughtful solutions to common challenges is key to winning the war for talent and continuing to grow across generations.

About the Author: David Twiddle is Managing Partner at TWYD & Co, a private talent advisory firm partnering with founders, family businesses, and family offices. David and his team specialize in recruiting non-family executives and navigating the unique people challenges within family-owned and closely held enterprises.