Company XYZ is owned equally by two brothers. They compensate themselves equally in all respects.

They have five children, four of whom work in the company and another who doesn´t.

They have always paid the employee children equally and given them equal bonuses despite unequal tenure, talents, positions, and contributions to the business.

The non-employee child gets paid a modest hourly wage when she fills in and gets a token bonus.

They don´t have a clear methodology for the distribution of the company´s wealth to the non-employee child. Recently the norm was broken in an attempt to reward extra effort by one child and punish poor performance by another.

You can probably guess the result: confusion, tension, and disharmony.

Company ABC is owned by two brothers who have unequal ownership and unequal pay with the majority owner and CEO sibling receiving slightly more.

There are three children (one is an in-law) working in the business. Their pay is appropriate to position and tenure. There is a second class of ownership (preferred stock) that is held by non-working siblings of the brothers and several grandchildren.

This division of stock was intended by the brothers´ father to give appropriate control to the sibling running the business while distributing the wealth created by and inherent in the company in fair (or equal) shares to his children and grandchildren.

While this would seem to be a reasonable method to accomplish fair sharing of wealth, there is no set formula for distributions to stockholders, nor any limitations on the executives in terms of salaries, benefits, or bonuses.

In effect, the son who holds the majority of voting shares in the company is in sole control of these decisions and has only his conscience for guidance. The family can only depend on him to be a fair steward of the family´s wealth.

Key Questions

What is the best way to ensure the fair distribution of wealth from the family business? How can this be accomplished and still have those most responsible for the success of the company in control over major business decisions?

How can jealousy or conflict be avoided when one family member gets a sizable paycheck from the company, while another may be struggling to live on a much smaller income?

Important Considerations Like most important issues in life, there is no "one size fits all" solution. Each situation must be treated differently taking into consideration:

• Differing levels of commitment and involvement in the business
• The percentage of family wealth tied up in the business
• The amount of wealth accumulation needed by the senior generation to assure their long-term standard of living
• Proper timing of turning over operating control to the children
• Proper timing for gifting or wealth distribution initiatives
• The financial strength of the company and its ability to support various levels of salaries or distributions

The key to success of a good program for fair distribution of business wealth is to put the company first. After all, the goose must live in order to lay golden eggs.

It´s vital to get the most capable talent in charge even if you have to go outside the family for a time. The capital and future operating needs must be met before bonuses and distributions are made.

The next necessary understanding is to distinguish between management compensation and ownership compensation. Salaries and bonuses are rewards for individual work and performance.

Distributions (whether director´s fees or dividends) are a return for ownership in the company. Distributions are often, in fact, gifts. As such, distributions usually should be equitable just as parents were equitable when filling their children´s Christmas stockings.

In a well thought out plan:

1. The total amount of money available for salary, bonuses, and distribution is determined by the success of the company on an annual basis.
2. Set a floor for adding to retained earnings.
3. Salaries are set at industry norms for the positions and contribution levels of different employees.
4. Bonuses are based on a percentage of profits over the floor for retained earnings or some other more specific determinant.
5. Distributions are a separate issue from salaries and bonuses and might range anywhere from 50% to 100% of net profit above the level for building retained earnings.

Poorly designed and misunderstood salary, bonus, and distribution systems are a major cause of jealousy, hurt feelings, severed sibling relationships, and lawsuits in family business systems. Often this is because the compensation program has been designed with tax avoidance as the primary or only goal.

The ideal compensation system is one that is fair, well understood, and promotes teamwork and harmony in the business family.