Unequal Pay at the Top

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.

- Advertisement -

 

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.

About the Author(s)

This is your 1st of 5 free articles this month.

Introductory offer: Unlimited digital access for $5/month
4
Articles Remaining
Already a subscriber? Please sign in here.

Related Articles

KEEP IT IN THE FAMILY

The Family Business newsletter. Weekly insight for family business leaders and owners to improve their family dynamics and their businesses.