How family offices can protect the bottom line when putting family members on payroll

Family offices, as private wealth management entities, often face unique challenges when it comes to integrating family members into their operations. While the idea of keeping it in the family can be appealing, it can also introduce complexities that might affect the bottom line. This article explores strategies for family offices to effectively manage family members on their payroll, ensuring both operational efficiency and family harmony.

Understanding the Challenges

Family offices serve a dual purpose: managing family wealth and ensuring the continuity of family values and legacy. This dual role can create conflicts, particularly when family members are involved in the day-to-day operations. According to Joshua Gentine, a consultant with extensive experience advising family businesses, one major issue is the potential for family members to underperform compared to non-family employees. This underperformance can create tension and place managers in the awkward position of addressing performance issues with someone who is also a client.

Statistics and Industry Insights: According to a report by the Family Office Exchange, nearly 70% of family offices employ family members, yet only 30% have formal policies addressing employment expectations and performance metrics for these members. This lack of formal structure can lead to high turnover rates, as talented non-family executives may feel undervalued or constrained by the dynamics.

Strategies for Effective Integration

1. Establish Clear Expectations and Roles

One of the most effective ways to manage family members within a family office is to establish clear job descriptions, performance metrics, and expectations. This clarity helps mitigate the "family first" bias and ensures that all employees, regardless of family ties, are held to the same standards.

- Develop Comprehensive Job Descriptions: Clearly define roles and responsibilities for family members. This ensures they understand what is expected and can be held accountable for their contributions.

- Implement Transparent Salary Policies: Establishing salary structures that are competitive and fair can prevent feelings of entitlement and ensure compensation is based on merit rather than familial connections.

2. Foster a Culture of Meritocracy

Creating an environment where meritocracy is prioritized over nepotism can enhance the credibility and efficiency of a family office.

- Performance Reviews and Feedback: Regular performance evaluations should be conducted by impartial parties to provide honest feedback and growth opportunities for family members.

- Professional Development Plans: Encourage family members to pursue external work experiences and education to broaden their skills and perspectives before joining the family office.

Utilizing External Advisors

Engaging external advisors or consultants can provide objective insights and support difficult decision-making processes. Many family offices, like Sargento Foods as noted by Joshua Gentine, have successfully utilized independent board members to guide decisions regarding family member involvement.

Case in Point: Sargento Foods employs a subcommittee of independent directors to evaluate whether family members should be promoted or let go, based on performance against established benchmarks. This approach removes personal bias and ensures decisions are made in the best interest of the business.

Preparing for the Worst-Case Scenario

Having contingency plans in place for underperformance or conflict can prevent crises from escalating. Developing a framework for addressing issues, including objective performance goals and resources for improvement, can make these situations more manageable.

- Objective Performance Goals: Set clear, measurable goals for family members. If goals are not met, have a pre-determined process for addressing the gap, including developmental resources or role reassessment.

- Conflict Resolution Mechanisms: Establish clear channels and procedures for conflict resolution that involve external mediators when necessary.

Conclusion: Building a Sustainable Family Office

For family offices, balancing familial bonds with professional operations requires thoughtful planning and execution. By implementing structured policies and fostering a culture of meritocracy, family offices can protect their financial interests while ensuring familial harmony. These practices not only secure the current operational effectiveness but also preserve the legacy and values that define the family's wealth for future generations.

By adopting these strategies, family offices can navigate the complexities of employing family members, ensuring both business success and family cohesion. The key is to approach these challenges proactively, with clear guidelines and external support when necessary.