Below-Market Compensation in Family Business Undermines Your Succession & Leadership Pipeline

How outdated family business compensation practices create talent acquisition challenges that threaten multi-generational success

In 2019, a family-owned business with $100 million in annual revenue approached Stranberg to recruit a CFO. When asked about their projected starting salary for this critical C-suite position, the owner's response was shocking: $80,000.

This wasn't just below market—it was the starting salary for an entry-level accountant fresh out of college, not a seasoned financial executive capable of stewarding a nine-figure enterprise.

How could such a significant disconnect exist? More importantly, what does this reveal about the challenges family businesses face in the talent marketplace?

The Multi-Generational Compensation Challenge: A Threat to Family Business Continuity

Family-operated companies consistently struggle with below-market compensation practices and often maintain antiquated approaches that make them uncompetitive when recruiting top talent. This compensation gap doesn't just create occasional hiring difficulties—it represents a fundamental strategic weakness that can threaten long-term business viability.

The root causes of this compensation problem typically fall into two primary categories:

1. Family-Controlled Discretionary Compensation: A Legacy Liability

Many family businesses maintain compensation models that originated in the 1970s and 1980s, where:

• Base salaries are fixed at below-market rates

• Variable compensation is determined through private discussions among shareholders

• Bonus structures lack transparency and objective metrics

• Compensation decisions happen behind closed doors rather than through structured processes

These discretionary practices may have worked in previous decades, but they're increasingly rejected by today's executive talent pool, who expect clarity, transparency, and market-appropriate compensation.

2. "Long-Termism": When Family Business Loyalty Becomes a Succession Planning Obstacle

Family businesses often pride themselves on executive longevity—what we call "long-termism." While having trusted leaders who've been with the company for decades can be beneficial, it frequently leads to compensation complacency.

Executives hired decades ago on then-acceptable compensation packages rarely see their total compensation packages properly adjusted to market rates over time. The family develops a false sense of what appropriate compensation should be, creating a dangerous disconnect from market realities.

This long-termism becomes problematic when:

• Long-tenured executives retire and need to be replaced

• The business needs to recruit new talent with current market expectations

• Compensation audits reveal significant gaps between internal practices and external market rates

Three Succession Threats: How Compensation Practices Undermine Family Business Continuity

Poor compensation practices in family businesses typically manifest in three specific ways:

1. Family Governance Breakdown: When Compensation Creates Conflict

When a family member exits the business and a compensation study reveals their salary was significantly below market rates, it creates intense personal discord. That family member may feel undervalued and underpaid by their own relatives—a conversation no one wants to bring to family gatherings.

2. Succession Pipeline Disruption: When You Can't Attract Next-Generation Leadership

Family businesses often understand they're below market in compensation but want to stay there while still attracting "A players." This creates an impossible situation: either the family must stretch their compensation policies (potentially creating internal equity issues) or compromise on candidate quality.

The harsh reality: If you go below compensation standards, you will compromise somewhere—usually on competency.

3. The Succession Transition Crunch: When Leadership Changes Trigger Compensation Cascades

Perhaps the most painful manifestation occurs when a family business decides to hire an exceptional candidate at market rates, only to trigger a cascading compensation problem. When existing executives discover the new hire is making significantly more than they are, they'll either:

• Demand renegotiation of their own compensation packages

• Leave for better opportunities elsewhere

Either scenario creates financial strain and operational disruption that could have been avoided with proactive compensation planning.

Building a Succession-Ready Compensation Strategy

 

Unfortunately, there's no magic solution to decades of compensation complacency. However, family businesses can take several concrete steps to improve their compensation practices:

1. Governance Best Practice: Regular Multi-Generational Compensation Benchmarking

Family businesses should institute annual compensation reviews that examine:

• Industry standards for similar roles

• Regional compensation norms

• Alignment with company size and complexity

• Both family and non-family businesses

This benchmarking should be a regular board-level practice, ideally through a formal compensation committee.

2. Successor-Ready Systems: Eliminating Family-Controlled Discretionary Compensation

Discretionary bonus practices should be replaced with structured, transparent systems. Today's executives expect clear guidelines about how their performance will be measured and rewarded.

3. Next-Generation Leadership Alignment: Implementing Performance-Based Succession Incentives

Set clear, measurable goals for executives and tie variable compensation directly to achievement of those goals. This approach:

• Creates alignment between executive and shareholder interests

• Provides transparency in compensation decisions

• Helps forecast compensation expenses

4. Family Business Stewardship: Strategic Compensation Compromises for Long-Term Success

Family businesses must determine where they're willing to make concessions in their compensation philosophy. This requires:

• Understanding your compensation limitations

• Identifying which roles truly require top-tier talent

• Planning for the financial impact of necessary compensation adjustments

Preserving Your Family Legacy: Balancing Compensation Tradition with Succession Planning Realities

Family businesses can honor their legacy while adapting to current market conditions. Compensation represents one of the most tangible expressions of this.

By acknowledging the compensation gap, understanding its causes, and implementing structured solutions, family businesses can position themselves to attract and retain the talent required for long-term success.

Looking to address compensation issues in your family business? Reach out to Stranberg for a consultation on how we can help you develop competitive compensation practices while respecting your family business values.

Learn about our compensation consulting service