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Choosing a family-friendly compensation consultant

Does your adviser have a background in consulting to business families as well as managing compensation programs in a variety of industries?

By Henry D. Landes and Karl J. Buehler

A family company’s first "compensation consultants" are often other business owners or perhaps business advisers (a trusted CPA or attorney) who try to help?but know little more than the business owner about the matter. The founder in effect serves as the first "personnel director," and hourly wages, salaries, benefits and bonuses (if any) are adopted quickly by "the seat of the pants."

Most business families can benefit from the deep professional knowledge and the individualized guidance of a compensation professional. The overarching goal is a compensation program that reflects internal equity between jobs as well as external competitiveness with other companies. A compensation consultant ideally should have a broad background both in consulting and in managing compensation programs in a variety of industries?including manufacturing, service and financial organizations.

Consultant qualifications

There are no formal university degrees in compensation. Generally, consultants gain their experience through on-the-job training, in either a consulting firm or a corporate setting. Those who gain their experience in a corporate setting tend to take compensation courses from World at Work, a Scottsdale, Ariz., professional association formerly known as the American Compensation Association (www.acaonline.org). There is a steady flow of experienced compensation professionals from consulting firms to corporations and vice versa. Ideally, a compensation consultant should have consulting experience across a broad spectrum of industrial and financial organizations as well as experience in developing and implementing compensation programs in a corporate environment.

A compensation consultant should have the following key technical qualifications:

• A strong background and experience in human resources management. Since employees represent the most significant competitive advantage of a business, your compensation consultant needs to understand and integrate compensation policies and procedures with the other key aspects of human resource management, such as recruitment, selection, training and evaluation.

• A solid understanding of how to achieve internal compensation equity among employees. In the overall scheme of things, internal compensation equity generally is more important than precise external competitiveness on a job-for-job basis. Your company’s employees are more likely to recognize that they aren’t being treated equitably among fellow employees than to have an exact understanding of what "the competition" might pay for their talents. To ensure internal compensation equity, jobs in an organization must be ranked appropriately to reflect the differences in job complexity and an impact on business results.

• An understanding of the differences between external compensation competitiveness and market pricing. External compensation competitiveness generally implies that the company’s average compensation practice is competitive with the practices of other employers. Pure market pricing means that a company sets the pay rate for each of its jobs strictly on what the competition pays for this particular job. Because pure market pricing conflicts with the concept of internal compensation equity, it generally should be discouraged.

• An ability to assess compensation survey results, recognize survey data anomalies and clean up survey data to exclude distorting factors. On the surface, this seems to be a simple task, but consultants who lack extensive experience in the data management of regional or industry-specific compensation surveys may be misled. Understanding the relationships of average to median, first and third quartile is vital. Both averages and medians have drawbacks, and one should not blindly use either one.

• Experience in developing a base compensation program that’s fair, competitive, affordable and easy to administer--and one that corrects inequities and motivates employees to do their best in achieving the company’s business goals. It’s imperative that the program be readily understood by everyone: owners, managers and employees. Employees can’t judge whether a program is fair unless they understand its basic concepts. If the program is to succeed, it must motivate employees, recognizing solid or above-average performance and contribution to the company’s profitability.

• An ability to develop effective variable, performance-based compensation programs. In companies in which labor costs play an overriding role in profitability, salaries and wages may be kept below competitive practices, but they should be supplemented by a bonus/incentive program that ties employees’ total compensation to the profitability of the company. In good times, a variable compensation program would ensure total compensation substantially above that of the competition, and in bad times the employer’s fixed compensation cost (wages and salaries) would be more manageable.

• An ability to develop easy-to-follow, time-proven compensation policy statements and administrative guidelines. This is essential so that everybody in management has the same understanding of what the compensation program is about?and to ensure consistent application of the program throughout the year among all employees.

Family friendliness

Because of the unique complexities of a family business, we’ve identified another seven "family friendly" characteristics of compensation consultants that, while less tangible, are equally important to business families.

1. An empathetic understanding of the complexities faced by all family members as they wear (and sometimes juggle) the three hats of business families: family, business and ownership. When these roles compete?or even collide?with each other, the fallout can have serious repercussions for both the family and the business. The consultant can help each family member become more aware of his or her various roles and the importance of keeping the lines distinct among them. Another way of getting to the heart of the matter: Businesses are based on performance; families are forever. The oft-delicate interaction between the "conditional" (business) and the "unconditional" (family) calls for great sensitivity by family members?and the consultant.

2. The readiness—even eagerness—to listen and learn about the legacy, values and vision that make each family unique. These insights will help provide the foundation for durable compensation policies and practices for present and future generations. Compensation consulting with business families is more than just running the numbers on an Excel spreadsheet; it also involves honoring the values of the family. For example: What is fair? Dad and Mom may have different views of fairness?and different ways of expressing their values. Money, of course, is only one way to compensate a person for services rendered. A creative and perceptive consultant will have many "compensation tools" (e.g., vacation time, company car, insurance) to achieve the correct balance for each family member.

3. Extensive experience and passionate interest in the dynamics, issues and best practices of business families. This includes a natural curiosity about people and families—and what makes them tick. It’s a decided plus when your compensation consultant has a basic understanding of family dynamics. We strongly advocate membership in the Family Firm Institute and active participation in a family business forum where he or she can learn from other advisers?and "walk in the shoes" of business families. Ongoing professional development on the "family" side of the equation is essential for compensation consultants working with family firms.

4. The ability to build trusting relationships with family members of all ages and to facilitate family discussions around compensation issues. By listening carefully and validating the comments of each family member, the consultant over time connects with each person in such a way that he or she eventually recognizes, "The consultant cares deeply about me." While family members naturally bring various levels of sophistication to business matters, the consultant must "be there" equally for everyone in the family circle. Compensation consultants are best positioned to help a family reach a durable consensus around the delicate issues of compensation when each member of the family trusts the integrity and competence of the consultant.

5. The capacity to "speak the truth in love," honestly critiquing family practices that are out of alignment with compensation policies (having the courage to offer unpopular advice or counsel if, in the consultant’s opinion, it’s in the best interest of the business and the family). When we "speak the truth in love," we take relationships to a deeper level, rather than dance along the surface. The consultant who is able to do this?in a loving and caring way?will actually enhance his or her credibility and standing as a trusted resource. Pertinent here is an old maxim: "People don’t care how much you know until they know how much you care."

6. The ability to teach basic concepts of compensation and express technical issues in ways that are easy to understand for family members of all ages (including about age 14 and up) who play various roles at the company. This educational role is crucial because, as indicated earlier, many family members lack sophistication—and are even naïve—when it comes to compensation issues. Respect for what each family member has to offer is vital for clear and empathetic communication with what is often a diverse audience.

7. Experience and ability to work collaboratively with other advisers, especially with family business consultants, in designing and leading family meetings that address compensation issues. Look for a consultant with "emotional elasticity"—someone who can go with the flow of the family-meeting process, which usually should also include other advisers. While they’re very important, compensation policies and practices need to be carefully integrated into the larger mosaic of other family business policies. Avoid consultants who seem more interested in creating fiefdoms under their sole influence. The key word here is collaboration with other trusted financial, legal and business advisers?for the benefit of the business family.

Where do you find experienced compensation consultants who meet these criteria? We suggest you begin your search by talking to other business families who have experience working with a compensation consultant. Check with fellow members, as well as the director of your family business forum. Your family business consultant also will be able to direct you to other appropriate resources. For regional and national resources, see Family Business Magazine’s comprehensive Service Directory (available in the magazine or through www.familybusinessmagazine.com) and the Family Firm Institute’s Directory of Consultants and Speakers (www.ffi.org).

We suggest you benchmark consultant candidates against the seven technical criteria as well as the seven "family friendly" qualifications. Indeed, this article could be used as a template in your search for a compensation consultant who can help you strengthen family relationships while building competitive advantage for the business.

Henry D. Landes is president and Karl J. Buehler is compensation consultant at the Delaware Valley Family Business Center, Sellersville, Pa.

Originally published in the Family Business Compensation Handbook, October 2001, by Family Business magazine.