Before you put your children on the payroll and give them a stake in the company, here are some things to consider
A client of mine had worked long and hard for many years to start her own business and build it into a success while at the same time raising two children in a happy marriage. That's what made it frustrating to see how she responded to what I call the "guilt card" when her children fell on hard times.
Her problems began when her son found himself out of work. She suggested he join her company, part-time, at a salary of $30,000. So far, so good. But soon he had arranged to get a bonus of $40,000 and a 50% ownership in his mom's business. When his sister realized her brother was pulling down an excess of $80,000 for working a few hours a week, she wanted in on the action.
The mother added her to the payroll and split ownership equally between them. Today, the three of them are each making approximately $250,000 a year. The problem is that the children are hardly coming into the office, much less making a contribution worth their compensation.
Often in my work as a family business consultant, I ask the parent who leads the business what they want for their children. Invariably the answer is that they want them to be happy. Obviously there's nothing wrong with that. And one way some parents try to assure their children's happiness is through providing financial resources. But children who are indulged in bloated salaries and do-nothing jobs aren't being helped and will likely not be happier as a result. And the vast majority of the time, these types of indulgences significantly hurt the business.
Overpaying any employee naturally increases the cost of doing business. When an employee isn't pulling his or her weight, it also reduces productivity. When other employees realize what's happening, it damages the morale of the entire workforce. And when ownership is distributed unwisely among a group who feel entitled to look out for their personal needs before the business' needs, decision making is seriously impaired.
In this scenario, the noncontributing family members are far more interested in drawing as much as possible out of the business than sensibly reinvesting in the enterprise. The business founder feels as though she can't make decisions without their input and permission, because such decisions could cut into the noncontributors' profits.
PRIVILEGES MUST BE EARNED.
Why would a business owner put herself in this predicament? Because sometimes children will withhold their love and affection until certain conditions are met—in this case, receiving a lot of money.
The solution to the guilt card play is simple. Give kids a chance to earn their privileges. If they don't, pay them off or cut them off. Doing it this way can turn a potential liability into a significant asset.
A highly motivated, well-trained family employee can help a business reduce costs and improve productivity. Having a potential leader in place who has demonstrated the ability to carry on the heritage of the company is likely to energize the workforce. And, while it's a mistake for business leaders to hold on to control too long, centralizing ownership to the extent necessary to make fast decisions will allow a business to better respond to changing conditions and compete more effectively.
VALUES BY EXAMPLE.
The reason businesspeople don't always employ this straightforward solution is also simple: The guilt card, especially when played by children, is powerful. Many of us are susceptible, and children in particular are, all too often, expert at deploying it.
The female entrepreneur I spoke of earlier resisted my efforts to get her to buy out her children and stop draining the business she had labored so hard to build. She said she had promised the children she would help them with jobs and ownership, and she couldn't back out now. My argument that they violated that agreement when they declined to work for their rewards went unheeded. She continues to work hard six days a week, while paying her children significantly more than they deserve for the few hours they work.
In the end, all you can do is give family members the tools to enhance their own happiness with your support. You do that by demonstrating appropriate business values and providing them with training and skills. Most of all, you demonstrate your own passion for leading your business. After that, as much as you may want to ensure their happiness, it's up to them.
Legendary investor Warren Buffett weighed in on this issue when he left the overwhelming majority of his vast fortune to the Bill & Melinda Gates Foundation rather than give it to his children (see BusinessWeek.com, 6/27/06, "Buffett's Mega-Gift"). In his trademark pithy style, the Sage of Omaha explained his move by saying he "wanted to leave the kids enough so they can do anything, but not enough so they can do nothing."