It’s our belief that a significant percentage of family business failures are a byproduct of families and their advisers having given comparatively much less attention to the antecedent imperative to succession planning- employment planning. Without thoughtful employment planning, families increase the risk of succession planning failures for a variety of reasons, including the possibility that potentially qualified successors a) won’t be attracted to work in the family business; b) get frustrated and leave or c) won’t be trusted by family members.
To reduce the risk of these and other related challenges, families in business together should develop an employment plan. While every such plan must be customized to fit a family’s unique constituency and circumstances, we have found that most thoughtful plans share the following components:
- Eligibility criteria: Families are well served by establishing — and adhering to — clear criteria that must be met or exceeded for members to be eligible to work in their business. Such criteria traditionally include a certain level of formal education and a requirement to gain experience by working outside the family business for a period of time.
- A compensation methodology: A methodology for how family members who go to work, and remain employed, in the business will be rationally compensated is key. Good compensation plans tend to set a family employee’s compensation on the basis of fair market value (what would the family pay a non-family member?) and seek to align compensation with both individual and organizational goals as well as the organization’s and family’s values and culture.
- Performance evaluation: While thoughtfully setting compensation is important, no less important is adjusting compensation based on relevant criteria. While a company’s overall performance and market conditions need, of course, to be considered, perhaps the most important criteria are based on fairly evaluating an individual’s job performance. Tracking performance evaluations over time can be particularly helpful when considering whether an individual is ready to be considered a successor.
Without rationally constructed employment plans, families in business together increase their risk of destructive conflict for a variety of reasons. For example, incumbent leaders, particularly founders, might feel that no one is demonstrably capable of succeeding him or her; or founders might feel that a junior generation family member is qualified to take over the business simply by virtue of being from the same gene pool.
Source: Friedman, Scott., Forbes, October 4, 2017; https://www.forbes.com/sites/forbescoachescouncil/2017/10/04/using-employment-plans-to-prevent-succession-setbacks-in-a-family-business/#5c7f242451a1