Keep it above board

Paul Dorf is managing director of Compensation Resources, Inc, New Jersey, USA

Good office politics start with solid foundations so everyone – family members and non-family employees alike – know where they stand. Paul Dorf emphasises the value of employment contracts and outlines the issues to consider when preparing them

Employment agreements have been around for a long time, but their use has expanded, as companies realise that they can benefit the organisation, as well as protecting the employee. Agreements are typically in force for two to three years for senior officers, and one to two years for mid-level employees. Most agreements also contain renewal provisions, which provides that the contract will automatically renew if, between 90 to 180 days before it expires, there is no declaration made to the contrary.

Title and responsibilities
The section defines the individual's job title, the primary duties and responsibilities of the position, and reporting relationships. This section is an aspect of the agreement that becomes useful in the context of family-owned businesses. Whereas non-family employees are typically hired for, and given definitive titles with specific job duties, the opposite is often the case with family members. Family member employees are often put into a special project role, which means that they are expected to do whatever is needed, ostensibly to handle whatever comes along and to learn all aspects of managing the company.
 
Bringing family employees into a company to maximise their assimilation and effectiveness, should be handled in a thoughtful and systematic way. A rough schedule covering types of assignments that could be expected, and an accompanying timetable for this educational process is needed. This should not be "cast in stone", since there must be sufficient flexibility to handle the dynamics of everyday business. Including the basics of the action plan in the employment agreement clarifies expectations, and will, in the long run, provide the basics of a sound training. The agreement should also specify the duties and responsibilities, reporting relationship, whether a board position is included, and the  training plan, if appropriate. Although this will not eliminate the issues, it should greatly reduce the uncertainty associated with the family hierarchy and job progression.

Compensation and benefits
How family members are paid is often a contentious issue, and therefore, could be the obstacle that stands in the way of preparing the entire agreement. There are four methods that are used to compensate family members.
 
They are: (1) paying all family members the same, based not on job duties or function, but rather on family generation; (2) paying them more than the real value of the job, because of "who they are"; (3) the opposite, which is to pay them less than the non-family members in similar functions, since they get their real value through their equity position; and, (4) paying them based on their contribution and performance, and using market comparisons as with other employees.
 
When probed, the method that family-owned businesses choose is usually supported with lots of rationale, whether it makes sense or not. In the long run, the compensation should reflect the level of contribution, as well as the duties and responsibilities that the individual is expected to perform. In any of these scenarios, the terms of the individual's compensation package should be outlined in the agreement.

If the business leader decided to pay above the regular market levels, this differential would best be memorialised in a separate off-line document, with the agreement showing the standard pay arrangements. The same would be appropriate if the scope of benefits and perquisites is greater than would be provided to similarly situated non-family members. A trusted payroll clerk would have to know of these arrangements, but if it becomes widely known, it will tend to spread discontent among others.

Having the family members in the same programmes as the non-family members for pay and benefits usually carries with it the requirement that they would be subject to similar goals and performance reviews. It is will cause problems if the family member's output is not up to scratch. Maybe that individual should be put into a job that they can perform, and where there would be much less opportunity for failure.

Equity and ownership
Family members either have or expect to have an equity position within the organisation. The ownership may be held by parents, jointly with siblings, in trust, or some other arrangement that was probably established taking into consideration the conservation of the estate, tax planning, and continuity of the company. Since these arrangements tend to be complex and amply covered in reams of legal documentation, it would not be appropriate to include this within the actual agreement, but only in those instances in which continued employment and actual ownership are tied together.

Termination and prohibitions
The sense that these areas need not be included is based on the premise that "blood is thicker than water" and that "families can always work out their family issues". Unfortunately, history has proven this wrong, since some of the ugliest business breakups and most heated competitive situations arise from disagreements and dissatisfaction among family members.

It is at the beginning of the family member's employment that everything seems rosy. But putting potential issues on the table when opposing positions have not yet been formed will go a long way towards reducing conflicts. The three prohibitions, should be spelled out in the agreement.
 
These include non-compete, non-solicitation, and non-pirating, in addition to general statements about confidentiality. However, a word of caution: the enforceability of many non-compete clauses has been challenged, so if the company deems this to be an essential part of the agreement for key positions, then provisions need to be defined and written in a way that does not severely limit the individual's ability to be gainfully employed in his/her area of expertise. Having the restrictive period equal to the period of severance and extended benefits could be supportive of the company's position on non-competes.

Another prohibition that occasionally shows up in agreements, and which is appropriate to consider, relates to outside activities the family member can accept, since these could serve as a detraction of the individual's attention and time from company business. Typically, these would require pre-approval by the company's board. Certain outside activities, including accepting board and officer positions in professional organisations, could enhance the company's status and serve legitimate business needs; however, participation in various philanthropic, religious, or government activities could be time consuming and not be in the best interests of the organisation.

Correspondingly, the agreement should identify the severance arrangements for the family member's termination from the company, appropriate to each of the typical scenarios that may occur. These generally are lumped into to three categories: 1) voluntary termination; 2) involuntary termination and termination for good cause; and 3) termination for cause.

Summary
There are many valid and justifiable reasons for preparing employment agreements covering senior level and key employees. In the case of family members, even though the sensitivities say it is not necessary, they are nevertheless as important, and in some ways, more important than those entered into for non-family members.
 
Addressing the employment relationships, compensation issues, equity/ownership arrangements and post-employment issues up-front should in the long run not only make for a smoother, more effective operating organisation, but also maintain the family relationship.