In the movie Jerry Maguire, Tom Cruise, as an agent, represents Cuba Gooding Jr., a football star looking to secure a new contract. Gooding wants to be highly paid and expresses his expectations with his “show me the money” routine.
It’s a little less glamorous in real life.
In a farm business, the owners, managers and labourers are often the same people, which can result in misunderstanding when it comes to compensation.
Compensation to ownership is in the form of return on investment. It varies from year to year and will be positive or negative. It can be adequate or inadequate, depending on the owner’s perspective.
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Compensation to management depends on what contribution a particular manager is making to the farm. It can be clearly or loosely defined.
Most farms will equate personal drawings as compensation to their management contribution. Contribution to labour is the best understood form of compensation, per hour or per month.
There are a variety of forms of compensation for these roles: dividends, wages, bonuses, capital appreciation of land and quota, training and perks, such as vehicles, vacations, trips, paid business and personal expenses.
Clarity and structure around compensation helps instill a positive work environment, which in turn helps increase productivity and profit. Clarity and structure also help minimize the risk of conflict.
A written compensation plan outlines exactly how money will flow to family members and employees and under what terms.
Designing a compensation plan for a family business raises the following questions:
- What is fair pay among family members?
- How do I determine a fair wage for family members and non-family employees?
- How should shareholders be paid?
- How can we resolve disputes over pay?
- How should family assets be handled?
The issue of fairness can come into question. It can be a difficult subject because everyone has a different idea of what is fair. A farm operating under a business-first philosophy would say that fair is being paid based on the job that is to be done, at the going market rate for the job. Hiring is based on the skills, experience and initiative that an individual brings to the job.
A farm operating with a family-first approach would say that all members are a part of the family and therefore should be paid the same irrespective of the job they do.
Another interpretation is if Child B has not done as well as the others. Is it fair to provide him so that he can enjoy the same lifestyle as others in the family? It can become quite complicated.
A well-designed compensation system that makes sense and is understood by all accomplishes the following:
- Maintains control and structure over pay.
- Keeps the business on track.
- Promotes individual development.
- Communicates a clear statement about work ethics and values.
- Encourages individuals to accept financial responsibility for themselves.
- Provides a clear understanding about the value of different jobs.
- Motivates individuals to perform well.
- Distinguishes between compensation and gifts.
A well-designed compensation plan helps keep everyone involved in the business working for what is best for all. Such a plan will guide family members in making decisions about who gets paid for what and how much. Trust will be built in a compensation plan only when it is applied consistently. The integrity of the compensation system is undermined as soon as exceptions are allowed.
For more information, take a look at Farm Management Canada’s publication, Managing the Multi-Generational Farm. It is available from www.farmcentre.com or by calling 888-232-3262.
