Executive compensation has been under intense scrutiny in the last few years. While news headlines question the validity of exorbitant salaries for certain high-profile CEOs, the debate within companies is whether their compensation packages are competitive enough to keep or attract the best talent, without going overboard.
As a result, many studies have been commissioned to provide data on executive compensation in public companies. But it is rare to find data on family businesses. This puts family owners at a disadvantage; there is no way for them to judge themselves by their peers, or to compare family business norms with those in nonfamily businesses.
To shed light on the situation, Family Business and Coopers & Lybrand, the international public accounting firm, surveyed readers on the levels of compensation and benefits for top executives and board members in their family owned businesses. Data was collected in December on more than 750 executives nationwide, in all types of industries, locations, and company sizes.
The results, summarized in the tables throughout this article, are encouraging in some areas, but raise disturbing questions in others. The top executives in family businesses earn as much as their counterparts in nonfamily businesses, for example, but other top executives earn much less, and have very little opportunity for equity ownership. On the other hand, family companies pay the chairmen of their boards far more than nonfamily companies, and reward the rest of their board members very well.
Executive Pay and Benefits
The survey asked for salary and bonus figures for executives. The results for the top three executives, grouped according to the sizes of their companies, are shown in Tables 1, 2, and 3, respectively. Interestingly, the top executive at companies with less than $1 million in annual revenues earns exceedingly more than the top executives at companies from $1 to $20 million in size. Part of the reason may be that many of the smallest companies employ only a few people; the owners do all the work and have few constraints on what they pay themselves. Still, the average total compensation to these chief executives is $182,876, a sizable percentage of the firms’ revenues.
Salaries for the second and third executive from the top follow a more conventional pattern; they are modest at smaller companies and rise steadily as company size increases. Bonuses build too, jumping significantly when companies surpass $20 or $50 million.
These figures should help family business owners gauge their compensation packages for top employees — and themselves — against other family firms. But family businesses as a group should take note that their executives earn significantly less than their counterparts in nonfamily businesses (Table 4), according to figures reported in published surveys. The average total compensation for the top family business executive, around $219,000, is comparable to that in nonfamily firms, but the compensation for all other executives lags greatly. The second through fifth highest executives in nonfamily businesses earn a base salary, on average, that is 27 percent higher than their counterparts in family owned businesses. Because bonuses for the two groups are similar, the gap narrows some when comparing total compensation, but nonfamily executives still make 17 percent more.
The good news is that benefits provided to executives in family companies closely track those in the general business community. The percentages of family businesses offering various benefits (Table 5) differs from general business averages by less than 5 percent, from medical and life insurance all the way down the line to club memberships and use of a company car. Note that many benefits — for family and nonfamily companies — drop off steadily from the top position down. For example, only 50 to 60 percent of the companies surveyed offer even basics such as medical and life insurance and retirement plans to the fifth executive from the top. This curve is similar for all of business.
Board Member Pay
Although family companies pay their top executives less than nonfamily companies do, they pay board chairmen significantly more. As shown in Table 6, fees to board chairmen averaged $35,863, and bonuses added $21,095 more, for a total of $61,567. This is far above the $26,740 average for total compensation in nonfamily companies. Typically in nonfamily businesses, directors don’t receive bonuses; typically, they receive a retainer plus a fee each time they attend a board or committee meeting.
Compensation declines sharply to $23,762 for the second ranking board member at family firms, which is comparable to the figure for nonfamily companies. The third position, which typically represents a general board member, receives about $13,000 a year.
Family business consultant Léon Danco says the reason board chairmen usually earn so much in family firms is that often “”the chairman is not truly a director. He’s usually an aging owner who is no longer managing the business. The kid is now president and the parent becomes chairman. This is just another way for the owner to take money out of the business.”
Employee Bonuses
Although family businesses pay executives less, they offer roughly equivalent bonuses, which makes them competitive on this score. But due to the prior lack of data, owners have had a difficult time deciding what factors to use to determine bonuses. Our survey reveals three factors that are critical, and all are used rather evenly. Table 7 indicates that management discretion, measurements of employee performance, and success in meeting preset objectives, are all important considerations in determining bonuses. The relative weight of these factors does not change much, either, in judging senior managers, middle managers, or general employees.
Equity and Ownership
However, as Table 8 shows, amazingly few owners are willing to offer equity positions to nonfamily employees. Family business really means family business. Even the highest ranking nonfamily employees are left out; only 4 percent of nonfamily executives receive stock grants, only 2 percent receive either stock options or phantom stock, and only 2 percent enter into partnerships. And in these cases, the average share of ownership reaches only 2 percent.
All other employees, from senior managers on down, are virtually written off from equity consideration.
As might be expected, family members dominate the top spot at family companies. Table 9 indicates their ownership share, too, is often significant, ranging from an average of 70 percent in companies doing less than $1 million to 30 percent at larger firms. In all size firms, family presence in the number two or three spot drops; in the smallest companies, family members fill 57 percent of the second-ranking positions and 20 percent of the third-ranking positions. The share of ownership for these people sinks to 10 and 7 percent, respectively.
Nevertheless, contrary to popular notions, the family presence in the top three positions remains significant as company size increases, even for firms earning more than $50 million a year. There is no drop-off in family involvement, or ownership percentage. Whether bigger is better or not, family control remains high.
Many family business owners want to compare their practices with other family firms. The data presented here should help a great deal. For owners who want to compare themselves with nonfamily companies, the scorecard looks like this: Family firms offer equivalent bonuses, equivalent benefits, and certainly compensate their board members favorably. Other than the chief, however, they are not paying top executives competitively, and are not providing equity opportunities to their key people.
Karen Sindelar is a consultant with Coopers & Lybrand’s Human Resource Advisory group in San Francisco, which specializes in compensation and benefits issues for a variety of industries and family owned businesses. A complete report of survey results, with detailed data by geographic region and industry, is available for $125 by contacting Ms. Sindelar at Coopers & Lybrand, 333 Market St., San Francisco, CA 94105, phone 415-957-3428.
1. COMPENSATION FOR TOP EXECUTIVE
Company size (revenues) |
Base Salary | Average bonus |
Avg. bonus as % of base |
Total cash compensation | ||
Mean | Median | Mean | Median | |||
Less than $1M |
$137,967
|
$144,000
|
$38,367
|
28% |
$182,876
|
$150,000
|
$1M to $3M |
79,349
|
75,000
|
7,812
|
10 |
86,391
|
90,300
|
$3M to $10M |
103,001
|
100,000
|
34,943
|
34 |
138,389
|
146,000
|
$10M to $20M |
115,662
|
96,000
|
81,438
|
70 |
197,330
|
126,691
|
$20M to $50M |
142,833
|
130,000
|
167,807
|
117 |
300,403
|
159,000
|
Greater than $50M |
241,250
|
236,000
|
169,504
|
70 |
413,004
|
336,000
|
All respondents |
136,677
|
130,167
|
83,312
|
61 |
219,732
|
166,332
|
2. COMPENSATION FOR #2 EXECUTIVE
Company size (revenues) |
Base Salary | Average bonus |
Avg. bonus as % of base |
Total cash compensation | ||
Mean | Median | Mean | Median | |||
Less than $1M |
$50,394
|
$40,000
|
$11,504
|
23% |
$65,608
|
$50,000
|
$1M to $3M |
55,359
|
52,000
|
3,586
|
6 |
58,945
|
55,000
|
$3M to $10M |
74,599
|
78,000
|
22,629
|
30 |
94,950
|
95,000
|
$10M to $20M |
81,240
|
65,000
|
31,719
|
39 |
113,113
|
84,350
|
$20M to $50M |
94,492
|
86,000
|
24,113
|
26 |
119,021
|
115,000
|
Greater than $50M |
162,983
|
150,000
|
77,444
|
48 |
240,427
|
180,000
|
All respondents |
86,511
|
78,500
|
28,499
|
33 |
115,344
|
96,558
|
3. COMPENSATION FOR #3 EXECUTIVE
Company size (revenues) |
Base Salary | Average bonus |
Avg. bonus as % of base |
Total cash compensation | ||
Mean | Median | Mean | Median | |||
Less than $1M |
$46,640
|
$38,000
|
$4,229
|
9% |
$56,769
|
$43,500
|
$1M to $3M |
46,282
|
39,709
|
2,041
|
4 |
48,553
|
41,400
|
$3M to $10M |
58,531
|
62,000
|
13,106
|
22 |
71,910
|
72,600
|
$10M to $20M |
64,908
|
64,000
|
26,568
|
41 |
87,014
|
75,000
|
$20M to $50M |
82,875
|
73,500
|
18,824
|
23 |
101,283
|
88,000
|
Greater than $50M |
100,545
|
100,000
|
59,290
|
59 |
164,335
|
150,000
|
All respondents |
66,630
|
62,868
|
20,676
|
31 |
88,311
|
78,417
|
4. COMPENSATION FOR #3 EXECUTIVE
FAMILY OWNED | NONFAMILY OWNED* | |||||
Position
|
Average base salary |
Average bonus |
Average total cash compensation |
Average base salary |
Average bonus |
Average total cash compensation |
Top Executive |
$136,680
|
$83,310
|
$219,730
|
$169,735
|
$59,300
|
$219,540
|
Executive #2 |
86,510
|
28,500
|
115,340
|
122,070
|
30,760
|
150,030
|
Executive #3 |
66,630
|
20,680
|
88,310
|
94,270
|
19,950
|
125,000
|
Executive #4 |
60,490
|
16,750
|
78,010
|
85,245
|
17,030
|
99,780
|
Executive #5 |
56,260
|
10,960
|
75,725
|
75,725
|
13,575
|
86,550
|
*Nonfamily data represents companies with revenues from $5 to $15 million, a central range against which to judge family businesses. Figures for family firms are from the Coopers & Lybrand survey. Figures for nonfamily firms are compiled from: Officer Compensation Report, A Panel Publication, 1994, New York; Finance, Accounting, and Legal Compensation Survey Results, 1991, William M. Mercer Inc., Deerfield, IL; Executive Compensation Middle Market Survey, 1991, Ernst & Young, New York; and Top Management Report, 1992, Wyatt Data Services, Fort Lee, NJ.
5. BENEFITS TO TOP 5 EXECUTIVES(percent of all respondents providing the following)
EXECUTIVE | |||||
Benefit | #1 | #2 | #3 | #4 | #5 |
Medical | 94% | 89% | 82% | 72% | 64% |
Dental | 59 | 53 | 49 | 43 | 40 |
Eye care | 23 | 20 | 18 | 16 | 14 |
Supplemental medical | 21 | 18 | 12 | 9 | 9 |
Physical exams | 26 | 19 | 16 | 10 | 10 |
Life insurance | 82 | 70 | 65 | 56 | 50 |
Split dollar life | 28 | 17 | 11 | 9 | 8 |
Supplemental life | 19 | 15 | 11 | 10 | 6 |
Retirement plan | 73 | 69 | 64 | 58 | 52 |
Supplemental retirement | 15 | 9 | 8 | 6 | 3 |
Company car | 58 | 49 | 38 | 25 | 24 |
Car allowance | 22 | 22 | 24 | 19 | 15 |
Association memberships | 44 | 34 | 23 | 19 | 19 |
Club memberships | 23 | 15 | 9 | 6 | 3 |
Board fees | 17 | 14 | 10 | 4 | 6 |
Other* | 15 | 15 | 13 | 12 | 10 |
*Included financial planning services, pension plan options, and complimentary food.
6. BOARD OF DIRECTORS COMPENSATION
Position | Is this a family member? (% yes) |
Average ownership | Average annual fee received | Average last bonus | Average total cash compensation | Average total compensation in nonfamily businesses* |
Chairman | 93% | 41% |
$35,863
|
$21,095
|
$61,567
|
$26,740
|
Position #2 | 76 | 17 |
14,079
|
8,861
|
23,762
|
22,220
|
Position #3 | 68 | 12 |
9,159
|
2,145
|
13,259
|
N/A
|
*For companies with less than $25 million in revenue. Sources: Corporate Directors’ Compensation, 1993 Edition, The Conference Board, New York; and Compensation for Outside Directors, 1991, Handy HRM Corp., New York.
7. BASIS FOR EMPLOYEE BONUSES(percent of all respondents that offer bonuses)
Employee type | Management discretion | Performance measures | Preset objectives | Other |
Executive | 50% | 27% | 20% | 3% |
Senior manager | 29 | 33 | 33 | 5 |
Middle manager
|
29 | 31 | 31 | 9 |
Administrative employees | 39 | 26 | 27 | 8 |
All employees | 36 | 26 | 25 | 13 |
8. EQUITY OF NONFAMILY EMPLOYEES(percent of all respondents providing the following)
Employee type | Stock grant | Stock option | Phantom stock | Partnership | Average percent ownership |
Executive | 4% | 2% | 2% | 2% | 2% |
Senior manager | 3 | 0 | 0 | 0 | 1 |
Middle manager | 1 | 0 | 0 | 1 | 0 |
Administrative employees | 0 | 0 | 0 | 1 | 0 |
9. FAMILY CONTROL AND OWNERSHIP
TOP EXECUTIVE | #2 EXECUTIVE | #3 EXECUTIVE | ||||
Company size (revenues) | Is this a family member? (% yes) |
Average ownership | Is this a family member? (% yes) |
Average ownership | Is this a family member? (% yes) |
Average ownership |
Less than $1M | 83% | 70% | 57% | 10% | 30% | 7% |
$1M to $3M | 100 | 31 | 62 | 16 | 46 | 4 |
$3M to $10M | 100 | 50 | 86 | 15 | 77 | 12 |
$10M to $20M | 92 | 41 | 54 | 9 | 69 | 12 |
$20M to $50M | 88 | 35 | 54 | 12 | 46 | 9 |
Greater than $50M | 92 | 43 | 50 | 12 | 27 | 1 |
All respondents | 93 | 45 | 61 | 12 | 49 | 7 |
— K.S.