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Woodbury:Farm Family Business 01/19 09:28

   Leadership From Outside 

   Excessive wages can give a family employee an over-inflated value of their 
worth to the business. 

By Lance Woodbury
DTN Farm Business Adviser

   Editor's Note: Lance Woodbury writes for both DTN and our sister 
publication, "The Progressive Farmer." He is a Garden City, Kan., author, 
consultant and professional mediator specializing in agriculture and 
closely-held businesses. To pose questions for this column email 
lance@lancewoodbury.com 

   Over the course of my experience in consulting with family-owned farms and 
ranches, there are a few critical decisions which, if approached and executed 
well, contribute to the longevity of the enterprise. This is the second column 
in a series suggesting several "make or break" decisions and the reasons they 
are so important. The first column dealt with the issue of gifting or selling 
the business. For several of the decisions there are no "right or wrong" 
answers; their success lies in their execution, regardless of the direction 
chosen.

   When it comes to valuing your contribution to the business, what are you 
worth? Are you worth what someone else running another operation might pay you? 
Do you assign yourself an hourly rate or a salary? Or do you focus on living 
off of what's left over, after everyone else is covered? 

   Now put yourself in the shoes of a family member returning to the business. 
What message do you want them to hear about compensation? Are they worth what 
they could get in a similar business? Should you consider what they might make 
outside of the agriculture industry? Are they to be paid less because someday 
they may inherit the farm? Or are they paid more because you want to entice 
them to return or stay? 

   Family member compensation is an issue that is at best awkward, and at its 
worst can destroy the business. This column aims to offer some suggestions for 
how you might think and talk about compensating family members.

   DISTINGUISH BETWEEN MANAGEMENT, OWNERSHIP OR GIFTS

   Family business consultants often discuss the different roles involved in a 
family business. One role is that of a family member: a mother, father, in-law, 
son, daughter, or cousin, someone connected by DNA, marriage or adoption. 
Another role is that of a manager or employee, someone working daily in the 
business and who has a spot on the organizational chart. Yet another role is 
that of an owner, a shareholder who has some amount of capital at risk in the 
business. Difficult issues often arise because these three roles exist 
simultaneously, and it can sometimes be confusing as to which hat someone is 
wearing when they communicate.

   When considering compensation, it can be helpful to consider assigning a 
value to a member's place in those three systems. For example, if someone is 
working in the management system as an employee or a manager or supervisor, you 
might consider their market value, that is, what they would be worth hourly or 
on salary to your business if they were not a family member. There might also 
be a bonus plan based on the profitability or performance of the business.

   If they are also an owner, you might develop a distribution policy around 
profits. For example, many families, if the business is profitable, might pay 
the owners a little more than the amount needed to cover state and federal 
taxes (often in the neighborhood of 40%). If the business is in a growth mode, 
you might not have a distribution, or if the business is mature you might pay 
out a higher amount. (Note that it is important here to consider the 
accrual-based profitability of the enterprise, not the cash left in the 
checking account, since the deferral of income or prepayment of expenses can 
create a distorted view of profitability.)

   If you pay a family member more than the prevailing market rate, consider 
calling that additional amount a gift or a bonus. The risk you run by not 
categorizing compensation in this way is that family members may develop an 
inflated value of their contribution. Or they may begin feeling entitled to 
unreasonably high payments, or you may begin to drain the equity in the 
business -- just at a time when such equity may be necessary to survive tighter 
financial margins.

   DIFFERENTIATE MARKET VALUE FROM FAMILY NEED

   Years ago, I heard of a family that based compensation for returning family 
members in part on their house payments. Well guess what the younger generation 
did? They began building bigger houses! 

   Family needs are often an important conversation when a family member is 
considering coming into the family business. But if you agree to pay beyond 
market value for their contribution, be cognizant that over the long run, the 
business has to perform better to sustain those higher than average payments. 
If it is a short-term strategy, it may be important to acknowledge those funds 
as a gift, or an early draw on their inheritance. Then make sure you have a 
clear conversation and understanding about the future of their compensation and 
your intentions.

   RECOGNIZE FAMILY BENEFITS AND SWEAT EQUITY

   One of the benefits of family business participation is the level of 
long-term commitment. There have been significant periods of low farm incomes; 
part of the sustaining force through those periods can be positive family 
dynamics. (Such times can also test family dynamics!) Agricultural family 
businesses often require long hours, face uncertainty in weather and markets, 
and are located in remote areas. The history, independence, flexibility, 
vocation and chance to work with your children or parents help offset many such 
challenges. 

   My point is that "compensation" is not measured just in terms of cash. And 
it goes beyond other benefits that can -- and should be -- financially valued, 
such as vehicles, fuel, housing, food and utility payments. There are reasons 
to think beyond the paycheck and discuss why you enjoy working together. Those 
reasons might or might not cause you to think differently about your cash 
remuneration, but the conversation you have now as a family about compensation 
and benefits can help prevent future conflict.

   Lance Woodbury can be reached at lance@lancewoodbury.com 

   Follow Lance Woodbury on Twitter @LanceWoodbury


(MZT/SK)

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