Contrasting Pay Systems

Chief executives of family businesses under $50 million make more money than their counterparts in public firms. Though their salaries may be lower, many receive bonuses that make up the difference—and then some. The CEOs of larger family businesses, however, take home less than their equivalents in public firms.

These are among the findings of a recent compensation survey by Coopers & Lybrand LLP, the international professional services firm based in New York City. The results from 122 respondents also provide some valuable perspective for CEOs wondering how much to pay themselves, how to compensate board members, and what benefits and perquisites to offer their executives.

C&L mailed a questionnaire to family businesses on a commercial mailing list in September 1995. It received returns from diverse firms nationwide, ranging from less than $1 million in annual revenues to nearly $800 million; 80 percent of the respondents were family CEOs of family firms, while 20 percent were nonfamily CEOs of family firms. For this article, C&L compared the results to data from its annual “Total Compensation for Top Management” survey, which tracks practices at 400 nonfamily companies, many in the Fortune 500. Companies were divided into four groups: less than $10 million in revenue, $10-$20 million, $20-$50 million, greater than $50 million. The median size was about $25 million.

Salary and bonuses. As expected, compensation for all CEOs increases as company size increases (see “CEO Average Compensation,” below). CEOs of family companies under $50 million receive 9 percent more, on average, than CEOs of public firms of similar size. For companies larger than $50 million, however, public CEOs make 15 percent more.

The way CEOs are paid differs greatly. Bonuses in nonfamily companies average 20 percent of the CEO’s base pay, but in family firms bonuses average 60 percent of base pay. CEOs of family businesses, it seems, hold their salaries down but award themselves much higher bonuses. C&L consultants maintain that family firms, especially smaller ones, try to hold down fixed costs, including salaries, to a greater extent than public companies. If the firm has a good year, the family CEO can take a handsome bonus.

Often, the media portray such bonuses as whimsical, claiming that family CEOs pillage the firm to pay for whatever personal items they desire. This is not the case: 88 percent of the respondents indicate their bonuses are linked to company profits; 34 percent tie bonuses to annual revenues (the percentages indicate a combination of profit and revenue is often used). Measures based on the value of the business, such as return on equity, assets, or market value, are rarely used to determine bonuses.

In company of all sizes, family CEOs of family firms are paid much more than nonfamily CEOs of family firms (see “Compensation for Family and Nonfamily CEOs of Family Businesses,” below). Total compensation in companies smaller than $10 million is a significant 45 percent higher for family CEOs; the difference decreases as companies get larger, but still amounts to 18 percent more in firms over $50 million. Family CEOs receive both higher salaries and bonuses. Long-term incentives for nonfamily CEOs are less frequent, too. In time, this may change, however; C&L consultants say more and more family firms are beginning to offer long-term cash incentive plans tied to performance, such as phantom stock, to attract, motivate, and retain top nonfamily executives.

Benefits and perks. Family businesses in the survey offer their executives benefits similar to those awarded by public companies. Some 93 percent of family firms offer life insurance, 70 percent provide 401(k) plans, and 62 percent have long-term disability insurance (see “Executive Benefits,” below).

Family businesses also provide executives with certain perks, such as company cars, mobile phones, and lap-top computers as often as nonfamily firms do. They are less likely, however, to hand out employment contracts and club memberships. Family firms are bullish on education and industry networking; 83 percent will pay for seminars and 52 percent will foot the bill for association memberships.

Board of directors pay. Despite the advice of family business experts, who maintain that an effective board must include several outsiders, most family businesses in the survey that have boards fill them with kin. Board fees may provide another way for owners to take money out of their company. At companies smaller than $10 million, 90 percent of board members are family. Family members fill 79 percent of board positions for firms $10-$20 million, 61 percent of positions for firms $20-$50 million, and 69 percent for firms larger than $50 million.

Board chairpersons—often the company owner—receive much higher annual retainers than other board members (see “Average Compensation for Directors,” below). The other directors often receive greater fees per meeting, though. Overall, chairpersons receive an average annual retainer of $9,900 and $700 per meeting; the other directors receive an average annual retainer of $6,700 and $1,100 per meeting.

These rates are slightly less than those for directors of nonfamily companies. The median annual retainer paid to non-employee directors of smaller public companies is $12,000, and meeting fees are $913, according to Client’s Monthly Alert, a newsletter circulated within the tax accounting industry.

Results of the C&L survey, the second in three years, continue to indicate differences in compensation for family and nonfamily CEOs of family firms, and CEOs of family and nonfamily companies. C&L consultants expect differences to diminish in the future, however, as more family businesses professionalize management, look externally for executives, and invite leaders of other companies onto the board.

Anne Baker is a consultant in the Human Resource Advisory group at Coopers & Lybrand LLP in New York City. The group specializes in developing strategic compensation programs for organizations. Full results of the survey are available for $150 by calling C&L’s David Konis at 212-259-1521.

CEO Average Compensation

 Compensation For Family/Nonfamily CEOs of Family Businesses

 Average Compensation for Directors

 Executive Perks(% of family businesses in survey that provide them)

 Executive Benefits(% of family businesses in survey that provide them)