Com-pen-sa-tion noun 1: payment 2: an attempt to make up for an injury, loss, or imbalance
THERE ARE TWO ASPECTS of the word compensate that make things complicated in family businesses. The first is rather straightforward; it has to do with a financial ledger. It is simply about money and benefits given in return for work. The second aspect of compensation is subtler and involves the intangible assets and liabilities of the emotional ledger in a family. The emotional ledger accounts for the balance of “give and take” between individuals in the family.
While transactions reflected in the emotional ledger can include money, the issues are typically more about recognition, personal feelings of earned merit, a sense of entitlement, trust, feelings of injustice, and the attitudes about the level of fairness that exists among family members. Examples of the kind of issues accounted for in an emotional ledger include:
“How can I make up for all those years I wasn’t there for my kids because I was building this company?”
“How can I make all my kids feel equally part of my life when some work with me and others don’t?”
“I took Dad’s crap for 15 years, but I refuse to take it now from my siblings just because he gave them some stock.”
Balancing both the financial and emotional ledger can become very complicated, as one founder–father found out a few years ago. As he neared his target retirement age, three of his five children were working in the business. He had no idea how complicated the situation had become.
His eldest son was the first to join the company and had worked there for 10 years. When the second-born son joined the business, he and the eldest son were in conflict almost continually over business issues. The father offered to set one of them up in his own business since the two clearly were not compatible business partners. The elder son chose the path of independence and did well for himself.
Now, as the founder nears the age of retirement, the second-born son has 20 years in the company and holds the position of COO, managing both manufacturing and sales. He has taken the company from $3 million in sales to $9.6 million in the past five years. The third-born child had become the personnel director seven years ago. The fourth-born child was hired to be the office manager only four years earlier. The fifth child was not involved in the business.
Despite some deep-seated ambivalence, the father and his wife decided that all three of his children in the business should be paid the same salaries, to minimize jealousy. He believed his other two children were doing well on their own. His youngest daughter had married well, and he believed she would have no financial concerns. The first-born son had his own business (that the founder had helped create). Because of these factors, the parents’ will stipulated that ownership of the company would pass only to the three children working in the business, and that they each would own one-third of the shares.
Tensions lurked beneath the surface. Although the oldest son had left the family business voluntarily, he had always felt betrayed by his father for not supporting his positions. Three of the children were deeply ensconced in the family business, one had left under questionable circumstances, and the other had never been involved. Family gatherings were often tense. The two children who did not work in the business often didn’t join in on holiday gatherings, saying they felt obligated to spend time with their spouse’s families. Although all of the family members prospered, the tension beneath the surface festered and grew.
Soon after the founder and his wife began to disclose their estate plans, the tension erupted into outward conflict. The youngest daughter, who didn’t work in the company, said that if her parents gave all of the stock to the three children working in the company, they would never see their grandchildren again. She said that her mother had always favored the three siblings that worked in the company and that she and her brother who had left the company had always felt short-changed by their parents. To her, the parents’ estate plan felt like the “last nail in the coffin” in their relationship.
The father was shocked at his daughter’s profound sense of injustice and depressed over the jealously among some of his children. As a result, he has taken no further steps toward implementing his estate plans. The issues feel so explosive, he hasn’t found a way to have the necessary conversations with his family.
This story shows how an imbalance of fairness (either perceived or real) in the emotional ledger of the family can insinuate itself into all of the thought processes and action steps in business management and estate planning.
There are rational ways to organize issues of salary, bonuses, dividends, and ownership. But in family businesses, all too often invisible emotional factors from the emotional ledger insinuate themselves into the formulation of compensation policies. Deliberations within organizational structures, such as family councils, create a context to make the unspoken spoken – to make the tacit, emotionally based assumptions from the emotional ledger explicit. These emotional ledger issues can be dealt with effectively only if the issues are brought out of the closet and into the light.
To the “technician” type of planner, the solution to inequalities in families is often found in technical tools – estate equalization techniques and other methods designed to balance the financial ledger. Our experience, however, tells us these techniques are largely ineffective unless the emotional ledger is balanced first. Any attempt to correct inequalities in the emotional ledger using financial tools alone is doomed to long-term failure.
The field of family business consulting is relatively young, and thus far there are few proven axioms. However, one is:
If you use salaries, dividends, bonuses, or ownership to manage family problems, the family problems will eventually control the processes and outcomes of business decision making in negative ways.
It is natural and predictable that families in business co-mingle the assets and liabilities in their financial and emotional ledgers. While it is not necessarily natural, it is extremely helpful in these situations to get outside professional help to work through any buried emotional issues and find rational ways to organize the objective planning issues to ensure the successful continuation of the family business and – most important – the continuation of the family as a healthy constellation of relationships. The business and the wealth it has generated are only one aspect of your legacy; the quality of the relationships you leave behind is also a testimony of your life’s work.
Helping families rebalance their emotional ledger is very gratifying work. While it is often hard work for the family, the process of rebalancing opens so many more possibilities than the family had before. Among those possibilities are greater trust, increased family harmony, and more secure assets. The emotional ledger sits at the root of many family-based business and estate planning issues, which is why MCS Financial Advisors embraces this aspect of the planning process in its work with clients.