As discussed in previous chapters, the family business's unique quality is precisely the fact that family loyalties (and issues) enable the business to often avoid the typical power and succession issues facing the usual small or medium sized business. This implies that the next generation of the family will ultimately not only participate in the business, but will ultimately operate and usually control the operations of the business and that this process may be repeated for generation after generation. While this has obvious benefits for both continuity in the business and family satisfaction, it can lead to a critical issue for non-family key employees and officers within the company who will thus not be likely to participate in ownership or control as normal within a typical small company.
The family owners must be realistic in confronting this issue and must determine if they wish to somehow resolve the loss of employees or morale that might otherwise be expected to occur as non-family employees face the fact that they will never be able to occupy the roles of family members or will be competing with them at a severe disadvantage. The use of "shadow" stock as bonus incentive was discussed in earlier chapters. The purpose of this chapter is to consider what other steps can be taken by the family business to retain vital employees aside from bonus and other direct monetary compensation.
One problem most "hands on" business owners encounter is that the day to day press of business results in their failing to see the forest for the trees. Long term planning is often seen as two to three months ahead with a vague notion that longer term planning must be confronted "someday." When children enter college or indicate a desire to enter the business, their integration into the business takes the place of long term planning, and a fantasy of the family working together in harmony for generations soon permeates the company's family owners.
For the family owners only, that is. For top employees or sales people, the possible or probable entry of the next generation is seldom welcome and always a worry. The long term employee will see the chances for effective ownership or control in the future replaced with a permanent "second class citizen" status to another person or persons who just happen to have been born into the "right" family. No matter how much fondness may have existed for the younger generation in the past, no matter how many family barbeques the employee attended as the kids grew up, the prudent owner must assume that the actual entry into the business of the future family owner will result in the forced alteration in view point on the part of a key employee.
Precisely what is altered? Any thought that the employee may someday own controlling interest is gone. Any thought that the employee may eventually buy the business is gone. Any thought that the employee's own skills or performance will be awarded with effective control is gone.
More, the employee must now conclude that a new generation, who may not have gone through the past experiences that have bonded the current owners with the employee will someday be in charge. As one key employee stated to the author a few years ago, "I starved with the founder, bled with the founder, plotted against the competitors with the founder, and now, when things are finally bearing fruit and when the money starts to roll in, Johnny Boy is getting the company and the power. He's not going to know what I went through, only his Dad does. And Johnny isn't going to much care." Despite our best efforts, that key salesman quit soon after that conversation which caused a real crisis in that company.
Equally difficult is the transition for the entering child or relative who feels resistance and resentment, overtly or covertly, from those who feel they have "paid their dues" yet are being potentially supplanted by the new generation. Instead of discovering how to learn the business and handle employees, the child finds him or herself confronted with a series of unpleasant encounters or passive resistance that can lead to precisely the wrong type of lessons being learned. Instead of welcoming communications and training, the child finds him or herself forced to prove ability at every turn without the type of committed support and training that any other new employee would expect.
Thus, the entry into the business can be destructive to the business, the employees, the new entrant, and the family. It must be carefully planned and implemented over time if such eventualities are to be minimized, and there ARE various tools that can be used to eliminate some, if not all, of the problems. Such tools are the topic of this article.
1. CREATING A NEW ROLE FOR POWER AND PRESTIGE: "ADVISOR TO THE PRINCE."
a) Is there Really A Problem? No One Has Said Anything
The first step is for the current owners to recognize the problem and to realize that platitudes or ignoring the problem will not make it go away.
While it is true that most employees will care little that the next generation has come into the business, indeed, may welcome it as an interesting development which will assure continuity in the company, it isthe key employees, the existing top managers who are at most risk for resisting and resenting the change. It is often found that they occupied the very role that the new family members are being groomed for, and it is they who are usually in the business not just for money, but for the power and prestige that the key employee enjoys. Too many family business owners blithely assume that some type of bonus or pay raise will assuage the newly disgruntled key employee: that may be true but often is not. The role within the company and the business must be redefined or the key employee may feel alienated within the structure. Most studies show that truly vital employees do NOT just work for money: job satisfaction is linked directly to status and identity with the company. Money alone may not solve the problem.
Inherent in the situation of potential dissatisfaction of the key employee is that it is often not clearly stated. While a key employee may express concern that he or she will be replaced or that ownership is no longer a possibility (both problems are solvable by increased pay or shadow stock as discussed in earlier chapters) the more ambiguous issue of prestige and emotional connection to the business is seldom discussed, much less resolved. Indeed, quite often the employee does not even recognize internally that there is a problem in that area, just feels a sense of increasing distance from the company or less concern over its long term health.
This is only to be expected and is a logical and perhaps inevitable reaction of someone who faces the unhappy truth that a family business is just that a business to be owned and transferred to the family. The question is how to make that key employee remain both a committed and productive employee.
Some owners have no problem with such key employees leaving but most recognize their value and also feel a high sense of loyalty to long term employees. They see the drop in performance and lowering of morale but feel helpless and caught between the dynamics of family and employee loyalty. "I could see him slipping away every week," an owner once told this author, "and I gave him bonuses and took him to lunch weekly, kept asking him if he was OK and was there a problem and he didn't say anything." That employee "retired" ten years before true retirement age the following month.
Of course the employee did not reveal his true feelings. He may not have even known what they were, but if he did, what could he say? Was he supposed to complain that the daughter entering the company was effectively making his role obsolete or potentially obsolete? Was he supposed to ask his boss not to promote the daughter or give her the company in time? Obviously, no employee is going to say that to the boss.
The way to seek to solve the problem is to anticipate it and to be proactive in approaching key employees and integrating them into the new roles they are expected to perform. It is not to make light of the change: it is to explain how the change can be to their benefit. One experienced business man made a tape of a presentation he gave to his top staff when his son graduated from business school and with some paraphrasing, it went like this:
"Look, I know all of you know Ed and know he just graduated from business school and is starting here next week. We all know he has a lot to learn. I hope and expect all of you to teach him. He knows he has a lot to learn and told me only last week that he figures he is really only starting the school that matters, now the family business and figures he has five more years of training to undergo before he knows how this business works.
You know that I have long hoped to have my son come into the business. That does not mean that he is going to start running the business tomorrow or be your boss the month after he gets here. It means he is an employee who will hopefully work his way into ownership if he shows he has the right stuff.
And I am hoping you will work with me to teach him the business since if he does master it, it means this business will outlast all of us and be there for the next fifty years, and we can keep building it for a long term future. I want you to know you will all share in it if you keep your current level of performance. We are creating a new bonus plan and pension plan that will assure a fair future to those who perform. I will be meeting with each of you to discuss it in the next ten days.
Ed has stated that he wants to learn from each of you and hopes you will understand that he has a lot to learn and is committed to being your student. He and I know that without your active help, it will take many more years for him to understand what is happening and that mistakes will be made that can be avoided by relying on your expert guidance.
And once he learns from you, he has hopes to expand the business in new and more profitable ways. That's the way of youth and I am sure many of his ideas will be abandoned, but I am also sure that some new ideas will be great for our business, remember, people like him are running our competitors.
It is the combination of his youth and your experience that can make this better for all of us and be sure we will do whatever it takes to make that combination work.
Did the speech work? No employee left, and the key employee became a true mentor to the son and kept working there long after the father retired. Note that both a new incentive plan and the role of expert for the son was emphasized, and note the not so subtle insistence that this transition will be made to work by doing, "whatever it takes."
And perhaps that is the key: not just reassuring the key employee with appropriate shadow stock and bonuses, though this may become vital, but redefining the role within the company so that the key employee understands that the new family member will both rely and interact with the key employee in such a way that the role will remain central and prestigious: that the key employee will occupy the role of key "advisor to the prince."
Some key employees will not want that: they, themselves, want only to be "the prince and heir apparent" and one can expect those people to leave no matter what the family does: they will go out and start their own business or work within a larger structure. But for the key employee who is simply unsure of his or her future and who does not need to be the key owner, creating this role may make the difference.
The key to the above was to include the employees in the transition, to make it a joint effort, not merely an imposed alteration in their future. Yes, the money mattered, but what also mattered was their role as mentor and "advisor" to the heir apparent was assured. It is true they were not going to be king, but being advisor to the King was not so bad.
b) And if the Heir Doesn't Want an Advisor?
It is not only the key employees who face a massive alteration in their work environment, but the current owners, and the new family member entering the business. Discussed below is the more difficult question as to how to evaluate a family member entering the business. The question for this section is how to handle the son or daughter resisting the advice and training that the key employee (or any employee) may be offering.
It is not unusual for the family member to have spent summers or even longer periods working in the family business and having been witness or participating in many conversations about the business (and its employees) around the dinner table. Indeed, the son or daughter may already own stock or options, either outright or in trust, as they enter the business and may have participated in numerous board meetings of the company as an officer or director in the past. Now, working for the company, they suddenly find themselves confronted with having to listen and, at times, obey employees of the company who are neither owners nor corporate directors and who they previously considered subservient to their family due to ownership rights.
In short, effectively the new family member may feel demoted in the new employment position and confronting a key employee already nervous by the new role and perhaps overreacting by becoming didactic, may resist having to report to and be trained by someone who, in turn, reports to his or her parents. While the first month or two of training may go smoothly, tensions can arise and the family member, feeling assured of their future, may begin to ignore the efforts of the employee to train.
Equally common, the key employee, over sensitive to slights, may feel the son or daughter is not taking the training seriously or will feel that each and every word will be reported to the boss, thus will become too nervous to do a good job in training.
Our experience indicates that the best way to avoid this is to confront the incoming son or daughter directly with the danger and indicate to them clearly that regardless of their potential and regardless of their university training, they enter the business as a neophyte and will act and respond to key employees appropriately as any other new hire. This must be stressed in no uncertain terms and repeated until the new relationship with the key employee is cemented and seems natural. One client we represented made up a memo to both the daughter and the key employee which stated the following:
You are about to begin training with Sid which I expect to last well over a year. You are my daughter outside of the business but inside of the business you are an employee and he is your boss. I advise both of you that I want that hierarchy to be fully understood by both of you and that you are to dedicate yourself to learning all he has to teach as fast as you can and following his instructions closely. This is business and I know you will understand the need for structural integrity as you come into the business."
The memo was written more for the key employee's comfort than for his daughter to whom he had already made the points clearly in family discussions. It seemed to work.
2. JUDGING PERFORMANCE: WHAT CRITERIA TO USE AND HOW TO COMMUNICATE IT
In the second chapter of this series of articles we discussed the issue of criteria to be used in bringing children or relatives into a business. Put simply, family members are not going to normally be treated the same in performance review as non-family members and everyone knows it. This is part of the nature of a family business. But the fact that relatives are given "more slack" usually does not mean that there is no criteria whatsoever for performance and most family businesses have an unstated but still powerful requirement of performance on family members and enforce that expectation by family pressure as well as typical business pressures. As one son-owner advised the author a few years ago, "A pay cut is easy to take compared to looking at my mother's face when she hears sales have gone down."
The most typical complaint from key employees facing a new family member entering the business is that they are allowed to work less and accomplish less than a typical new hire and have no worry about failing to perform. The usual response of the elder owner (" My kid had better perform or I'll kick him out,") or similar words is usually taken with a grain of salt by most key employees and with good reason.
It has been stated before but deserves to be stated again: the essence of a family business is that family considerations are added to business considerations with the result being a mix of relationships and expectations in the family business that make it most unlike a typical business. One of those aspects is that the new generation is not treated the same as any other employee and there is no reason to pretend otherwise. A different criteria applies, different pressures are brought to bear, a different future is envisioned.
For the purposes of this article, however, the issue is how to communicate to key employees that some criteria for performance will still be applied and the new family member will be accountable and of value to the company? What can be said that is believable and what should be used?
One very successful entrepreneur known to the writer was able to bring in all four of his children into a service company (though after he left the children destroyed the company by their own in-fighting) and to do it without losing any key employee. He advised the writer that he made it clear to his Board of Directors and key employees that as much as he loved his children, business had a brutal honesty in criteria of performance: if the business does not make money, if the employee is not of value to the business, either someone else makes up the difference or the business fails. He set objective monetary goals of performance for each child, monitored them closely, communicated performance to both the child and key employees, and adjusted salary predicated on performance. (One of the children failed to perform adequately for the first year and had his salary cut in half, the money going instead to another son who was performing very well. That "woke up" the son not performing and within a year afterwards, performance equalized.)
In certain job performance money is not the way to judge it, but almost always there is some method of evaluation. For instance, a child assisting in human resources may be advised to handle certain reports and goals and may see the salary adjusted predicated on that performance.
It is quite dangerous for morale of both the incoming child and other employees to simply bring a relative in, impose no performance criteria, and allow failure to perform to have no ramifications. It will not only sap the morale of the other employees-it will teach the newcomer precisely the wrong lesson. Business has its requirements. If you do not set criteria for performance, you are endangering both the business and the education of your incoming relative.
Quite often the criteria is not set until a three month introductory period is completed but it is vital to set the criteria (and communicate same) shortly thereafter. If the criteria can be objectified, and understandable by reviewing financial records, the matter is made relatively easy. However, if a employee finds him or herself judging the child of the owner, it is easy to see that real problems can arise.
The most important but unstated task is for the older generation to determine what criteria they will apply and who applies it, then communicate it. And here the parent must be brutally honest with him or herself: what will you do if your child does not apply themselves; how will you judge that; when will you fire them? If you have no intention of ever firing your child no matter what happens, then you should reexamine your purpose in bringing them into the business, for the business can not succeed if you place in potential authority someone above criteria for performance. If you do set criteria, the key is to objectify it as much as possible and make sure both your family and your key employees know it is in place and will be enforced.
In the next chapter in this series we will discuss disputes between key employees and children, and disputes between the next generation as they come into the business