How do I manage unproductive family members who are in the business?

This is a nuanced topic because no family is exactly alike, and family business cultures are just as diverse.

Imagine a scenario where two siblings own the family business as 50/50 partners. Both work in the business. However, one believes they are contributing more than the other.

Consider five key areas:

1. Defined roles

2. Defined expectations

3. Defined evaluation

4. Defined rewards

5. Defined competencies

Defined Roles

First, do both family members have well-defined roles in the business? Are job descriptions robust and documented? Do each of the owners have the skills necessary to be successful in their respective roles?

An unclear or fuzzy role can foster underperformance. The “productive” owner might interpret underperformance as “unproductive.” Sometimes, the line between owning a business and being an employee can be difficult to locate but it is crucial to understand and abide by.

Defined Expectations

Self-awareness is important. If we judge the performance of a family member as unproductive, asking why can help. Are our expectations reasonable and achievable? Are unrealistic expectations converting to unhelpful characterizations. “Root cause” thinking can help. The rule of thumb is to ask “why?” five times after observing the behaviors that lead to conflict. An outside-in view might help; consider asking for other opinions, keeping in mind the importance of respect and confidentiality.

Don’t underestimate the way family dynamics can show up in the business – historic sibling rivalries or parent and child issues at home can follow us into the office. Be aware of how personal dynamics influence working relationships. Although it can be difficult and takes emotional discipline, try to set aside negative dynamics and seek to better understand the unproductive family member’s work situation. This is a relationship worth preserving in many cases.

Defined Evaluation

Here, fundamental issues of fairness emerge. Is each owner’s performance being evaluated just like any other employee? Is the evaluation objective and based on metrics that matter the most for the position they occupy? Family members who work in the business should be evaluated and paid fairly. Their

family status confers no special treatment, one way or the other. Treating owners as any employee would be can also have a positive impact on the company’s culture because it stresses the importance of equality.

Defined Rewards

It is extremely important to benchmark job compensation against the market. Underpaying or overpaying a family member means you are not getting a true picture of your profits and losses. The replacement cost of a particular position must be accurate. Fill that box on the organizational chart as if it were a non-family member and pay appropriately based on performance. If there is a conflict or deadlock regarding family member compensation, a company board can help.

Employment compensation is entirely separate from owner distributions or dividends (“distributions” apply to S-corporations and LLCs; “Dividends” are used for C-corporations). Businesses with more than one partner will benefit from a good distribution or dividend policy. These types of policies are not difficult to develop but they challenge owners to think about when and under what conditions to make a distribution/dividend. Strategic distributions based on previously agreed financial metrics reduce the risk of having to reinvest an owner’s after-tax proceeds because the need for future cash flow has been incorrectly estimated. Our rule of thumb is to be conservative, but when the company’s performance meets the metrics, keep the promise and distribute the proceeds

Defined Competencies

Unproductive family members may be struggling because their skillset is poorly aligned with their job. In some cases, family members are elevated into management or executive roles because of bloodline/marriage or granted authority before they are ready to wield it responsibly. It is unfair and unrealistic to place a family member in a job they aren’t well-qualified to do and expect them to excel. The company culture will undoubtedly suffer – and it is certainly awkward to terminate the employment of a family member who is also an owner.

What can you do when you must manage unproductive family members? Don’t shy away from these important conversations. You can leverage the advantages of long-standing family relationships: create a safe space for non-judgmental conversations, clarify roles and responsibilities, set fair and reasonable expectations for productivity, seek consensus and create a plan. You may find healthy common ground and strengthen your relationship as a result.

To hear more on this topic, watch How do I manage unproductive family members who are in the business?