Avoid These Family Compensation Traps

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Salaries, compensation and non-monetary benefits are all sticky topics – especially in a family business. How do you decide who in the family is paid, and for what? Do perks such as use of the farm truck, or on-farm housing count as compensation? Here are best practice tips from experts in the field.

Farmers tend to fall into common traps, says Wesley Tucker, University of Missouri Extension field specialist in agricultural business. The top two traps include:

  • Not adequately compensating family members for what they bring to the business.
  • Overcompensating family members who aren’t equipped to advance the business.

“Compensating family members with less than what they’re contributing to the business or what they could make at another source of employment is dangerous and can damage the long-term future of the business,” Tucker says.

Alternatively, overcompensating family members who don’t deserve it can damage morale with other family members and employees, which can lead to poor performance.

It also helps to think of family members’ salaries as a separate bucket from what they’re paid for having capital invested as an owner, says Davon Cook, principal and co-founder of Ag Progress at K·Coe Isom.

“If you had your capital invested in the stock market, you’d expect to get some return in the form of a dividend,” she says. “In a best practice world, the only difference is it’s invested in a business you own. So, you have some capital tied up that's profit and generates returns. But you’re also paying people for the work they're doing.”

You can’t always hit the ideal, but a lot of the time people end up using a strategy that leads to minimizing a cash salary, Cook notes. If the business isn’t generating enough income to pay out a lot of cash, or the philosophy is to keep buying more land or investing in equipment, that can lead to frustration.

“Over time people feel they're not getting fairly compensated for their labor because they're not getting the salary that's recognizing their contribution,” she says. “We even have families struggling to pay the bills or provide the lifestyle they want for the family because it all stays tied up in ownership.”

When disputes arise, consider these strategies. First, think about compensation in terms of what it would cost you to hire someone outside of the family to perform this work, Tucker says.

“Open communication is key to any relationship but being willing to have an honest and open discussion about what a family member brings to the business and its value sets the groundwork for better understanding,” he says.

The farm is a business and compensation and performance should be run as such, even if it is among family members. If you were working for a local implement dealership, you’d have a performance review, compensation discussions and goals to work toward. Do the same for your farm, Cook says.

“If you are in conflict, think about how to bring in some third-party information to help you. If you have a board of directors, ask them to give some guidance,” she says. “You can also hire a consultant to give you input. They’ll perform a ‘comp study,’ which will tell you what market-based compensation would be for comparable skill levels and positions if you went to a different company.”

Put It On Paper

Once you agree on compensation, write it down. Include any non-monetary compensation, such as housing provided, or use of a truck and gasoline. Those items add up and are easily forgotten. Note the value of those fringe benefits.

“Whether it’s a half of beef or great wages or a vehicle provided — get all of that on one piece of paper for everyone, because those items can add up to a lot of money,” Cook says. “Maybe an employee’s spouse doesn't understand why their paycheck looks like it’s only $25,000 per year, but in reality, that's not true. Documentation is really important, so everyone is dealing with the same set of facts.”

 

 
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