SUCCESSION PLANNING
When Hiring Family Members,
Avoid These Mistakes

BY MIKE COHN

Sometimes family members who have been recruited to join the business can be groomed for the CEO or general manager's role. What could be better than a competent second or third generation son or daughter taking over the business? But before the dream disappears into a cloud of disappointment, do a reality check.

If you have already recruited family members to join your business (or, are thinking about doing so ) do they have a clear career path in the company? Are they supervised by a non-family member? Are they paid at market rates for the work they do? Are they gaining the respect of their peers in the business? Do they work harder than everyone else?

There is plenty of complexity when working with family members due to family dynamics; conflict in businesses that have tried to address succession with family members is well known. Indeed, one popular statistic is that 70 percent of first generation businesses do not survive into a second generation. On the other hand, business owners who can successfully develop a family CEO or COO have accomplished what most others cannot: perpetuating a private company and creating a legacy for family members.

Some of the mistakes start with how family members (and which ones) are "recruited" to work in the business. Some entrepreneurs have made the following mistakes when involving family members in the business:

Mistake 1:  Having an open-door policy for all family members who want to work in the company, i.e., any family member who wants to work in the company can do so.

Try this instead:  implement a Family Employment Policy so if family members are qualified (by education and work experience) they can join the business, but only if a position is open - see sidebar).

Mistake 2: Paying family members the same salary/bonus regardless of position or experience.  Equal treatment works in families but usually causes conflict in businesses.  Or, business resources are used to support family needs, generally by hiring and overpaying children, or paying them what they need to live a comfortable lifestyle.

Try this instead:  establish a compensation policy for the job and pay what the job is worth, not what family members need.  If in doubt, hire a compensation consultant to help you determine a pay range for the job in question.  Provide "perks" and other benefits relative to the job.  Reexamine your benefits program if necessary.  Consider a performance-based pay plan.

Mistake 3: Leadership is "bestowed" by the founder; the eldest son may be anointed as crown prince, regardless of skill, leading to family conflict among siblings.  Or, longevity in the business is seen as more relevant for a potential successor, more so than outside experience and/or qualifications for the job.

Try this:  implement a leadership-development program in the company both for family and non-family members.  Take advantage of leadership training programs offered by local universities/colleges or your trade association.  Set up a mentoring program.  Establish expectations for performance in the program.

On the other hand, when private companies successfully recruit family members, typical characteristics are:

• Compensation for family members is based on market rates, responsibility and performance.
• No nepotism÷leadership is earned.
• Business resources are used strategically for the company÷no unusual family "perks."
• Outside experience is important for family members who want to join the company.
• There are clear boundaries between the entrepreneur's family and its business interests.
• There are strong outside influences on the board.

Recruiting family members to join the business isn't hard. But making sure you have the competent ones, and then can keep them motivated and challenged, is a tough task that ties into CEO succession. It is like the old story about inviting the elephant trainer to dinner: Make sure you also have room for the elephant.