As mentioned in my recent columns concerning family affairs, nonfinancial issues can bring businesses to a standstill, hindering profitability and economic performance. Another area that can bring fireworks to family dynamics is compensation.
A “kiss of death” to businesses is bringing the younger generation into the business on a manager’s salary, but with hired employee work or skill sets. This principle is accentuated in a volatile economic climate. Also the use of technology is demanding higher levels of skill sets on many farms and ranches. Another “kiss of death” can apply to the senior generation. They will often mentally and physically retire from the business, but not financially. Both of these situations result in an overnight increase of fixed costs as management salaries are often considered a fixed cost.
A few years ago, I was working as a dual facilitator with another professional in a family farm business situation. We brought up the subject of compensation concerning the son-in-law and daughter managing the farm business, which was performing very well. I mentioned that the individuals operating the business were receiving modest compensation given the size and scope of the business and excellent performance. A situation similar to World War III broke out, which almost brought family members to fisticuffs in front of the lender! What was the issue? One outspoken sister asked, “What about all the perks they receive?” Wrestling and shouting ensued, but eventually this “WWF” of a family affair quieted down so logic could prevail.
The bottom line was that when all the perks were summed up, such as a house, car, travel, extended vacations, fuel, football stadium skyboxes, etc., the value of the perks equaled the amount of cash wages, effectively doubling the value of their income and making the wages seem more reasonable. Once this was spelled out, the level of tension in the room dissipated. Also another issue was resolved after some discussion regarding the complaining sister receiving money from the family business by the mother to supplement her failing business.
Compensation and passing of wealth in an agricultural economic world of high net worth and big numbers is a high priority on the planning list. Quotes such as, “You cannot treat all family members equally, but fairly and equitably,” as well as “Mom, Dad, and grandparents must live until they die” referring to transition versus estate planning come to mind. Many multigenerational farm family businesses will often need to seek outside expertise and counsel when planning for the growth, evolution, and transition of a family agricultural business.