Compensation Conflicts in Family-Run Investment Firms
With the rise of private investment firms, an increasing number of wealthy families are tapping into this trend to provide job opportunities for their millennial and Generation Z descendants. This move not only ensures that their wealth stays within the family but also gives the younger generation exposure to the world of investments and startups.
However, this arrangement isn't without its issues, particularly when it comes to deciding on compensation for family members.
The Salary Struggle
It's been observed that family members involved in these private investment firms often earn less than what they potentially could outside the family business. This is particularly the case with smaller firms. The justification often given is that these family members are already receiving dividends or have significant wealth, so they do not require a market-based salary.
However, this approach can lead to tensions within the family. Some family members may feel undervalued or underpaid, but they often hesitate to negotiate due to feelings of loyalty or fear of appearing greedy. This dynamic is unique to family businesses, where personal relationships can complicate professional negotiations.
The Golden Handcuff Dilemma
On the other hand, some family members may find themselves earning more than the industry standard. While this might seem like a good problem to have, it can actually create feelings of being trapped. These individuals might want to explore opportunities outside the family firm but feel obligated to stay due to their inflated salaries. This situation, often referred to as golden handcuffs, can also lead to dissatisfaction and resentment.
Disputes and Generational Expectations
- Disagreements over compensation are common in family-run businesses, though they are rarely discussed openly. This can strain family relationships, especially when promises regarding bonuses or incentives are not fulfilled.
- Generational expectations can also lead to conflict. Older family members who built the business from scratch often benchmark salaries against what they earned at their children's age, without considering the current market rates or the increased cost of living.
The Need for Structure
Family-run investment firms are often less structured when it comes to defining job responsibilities and compensation. This lack of clarity can lead to unfair practices, such as paying all members of a certain generation the same amount, regardless of their actual duties.
The best way to handle these potential conflicts is to prevent them from happening in the first place. One approach is to bring in compensation consultants to set salary levels based on market rates and job responsibilities. Alternatively, a committee could be set up to address any issues that arise.
The Changing Attitude of Younger Generations
Interestingly, the younger generations are becoming more assertive when it comes to their compensation. They are not content to simply trust the older generations' word and instead want formalized compensation plans put down in writing. This could lead to a shift in how family-run investment firms operate, making them more in line with other businesses in terms of transparency and fairness.