Without Strategy, Compensation Studies Fail Family Businesses

Bill Stranberg
6 minutes ago
4 min read

Compensation studies give family businesses a snapshot of the market – but require context and strategy to be maximally valuable

For 40 years, Ari was a stalwart employee for a small, privately owned, newly formed family business. She joined the company out of college as an accountant and, as her tenure wore on, she assumed more – and more disparate – responsibilities. Eventually, she became the organization’s first CFO. Over the years, her compensation was adjusted only sporadically, and primarily in the form of cost-of-living raises and irregular discretionary bonuses.

When Ari announced her retirement, the second-generation CEO, Dan, was confronted with a couple of unpleasant realities: first, he would have to find a replacement for a Swiss army knife of an employee, then, he would have to contend with the fact that the company had been inadvertently paying Ari tens of thousands of dollars below the competitive market rate.

To attract Ari-level talent, Dan knew the business would need to make some adjustments and hard decisions. For decades, his family had relied on instinct to guide its informal compensation policy. To introduce greater objectivity into the process, and help decide what to pay Ari’s replacement, he spent thousands of dollars on a compensation study from a major recruiting firm – only to find that it failed to serve his needs. The data was pulled from public companies and was based on CFOs whose job descriptions only vaguely resembled Ari’s.

Dan didn’t know what to do with the comp study – and was left wondering what he paid for.

__________

While the story above is fictional, it’s representative of the compensation-related challenges many family businesses face during leadership transitions. Few family-owned and founder-led organizations conduct routine benchmarking, and executive turnover is rare. As a result, many are surprised to find that the salary they plan to pay a new executive isn’t competitive. Then, in addition to figuring out what—and how—to pay their new executive, they are forced to consider the ripple effect any decision made will have. Hiring a low-cost, subpar executive could cause significant damage to the organization. Shelling out for a costly, competent leader could rankle employees with below-market salaries.

Comp studies can be a helpful tool for family businesses, but they paint an incomplete picture. Without context or a coherent strategy, it can be challenging for a business to translate the data into a compensation package that makes sense for the open position – and the organization at large.

Comp Studies Don’t Capture the Realities of Family Businesses

Family-owned businesses are often tight-lipped when it comes to sharing information with surveyors about their compensation policies or operational practices. Because of this, the majority of comp studies fail to capture data that’s more than superficially relevant to family businesses.

Data Origin

Comp studies aggregate data that is either publicly available or collected from survey respondents. Because data from public companies is more readily available, the majority of studies are skewed toward those organizations. Family-owned and privately held businesses may struggle to see how the comparatively high salaries and equity-heavy compensation policies offered by public companies pertain to their business and needs.

Data Points

Firms create comp studies by plugging relevant information—including job title, industry, company size (by revenue or employee count), and location—into an algorithm that generates a representative salary range. Because studies are a collection of numbers in and numbers out, they fail to capture critical nuance – especially when it comes to titles.

The Title Trap

Databases operate on the assumption that there is a consistency in responsibilities from organization to organization. In reality, an “executive VP” could be a seasoned professional with decades of experience at one organization, and a promising, but inexperienced 28-year-old with a vanity title at another.

This lack of uniformity is a general weakness of comp studies – but is a particularly acute problem for family businesses. Those who work for family businesses often end up wearing many hats and assuming a litany of duties that fall outside their formal job title. Capturing those varied responsibilities is nearly impossible to do in a comp study.

Why Data Alone Doesn’t Suffice

Despite their shortcomings, comp studies are a useful tool. They reflect where the market is at a given time and give organizations an idea of the salary range competitive executive candidates will expect.

But data alone can’t inform a meaningful compensation package or policy. When organizations base compensation decisions solely on a comp study, they risk making decisions that suit a dataset but not their business. Context, nuance and strategy are also needed – and are required to answer the bigger questions that can arise around compensation, including:

How an organization operating below market value can course correct
How to balance considerations about a new executive’s pay with current employees’ pay
Whether it makes more sense for an organization to stretch its budget for an accomplished executive with proven experience or save money by hiring an under-experienced but promising candidate who could do the job

The Solution: Marry Data with Strategy

Stranberg’s compensation consulting service gives family businesses the data, context and strategy they need to create competitive compensation packages that attract high-performing, right-fit executives. Our process is grounded in objective market data but extends beyond the numbers: we also consider responsibilities—not just titles—and the values and goals of the businesses we work with. From there, we help families craft sophisticated compensation strategies and navigate compromises they may have to make about costs and candidate quality.

Here’s how it works:

Step 1: Benchmarking

Our team accesses multiple comp studies and identifies trends in the industry, function, region and ownership. We then compare that data against clients’ practices, needs and goals.

Step 2: Advising

We leverage benchmarking data to design tailored executive compensation plans that include recommendations about base salary, incentives and long-term rewards.

Step 3: Implementation

After a job offer is extended, Stranberg helps families negotiate to ensure owners’ and new executives’ compensation expectations align.

Get Help Attracting & Retaining the Right Executive

Compensation consulting is just one facet of Stranberg’s family business executive succession planning process. Our process, which begins with leadership consulting, continues through executive search and ends with executive integration, focuses on fit and results in executive placements who help family businesses thrive for generations to come.