Compensation will become a more important topic in the years to come.
Farms are becoming larger and more complex, and more people are involved in many roles: ownership, management and labour.
Non-family members have key management roles in many farms.
For these reasons, understanding and proactively dealing with compensation is increasingly important.
Managing compensation can be challenging. People expect to be paid for the contribution they make to the business.
It can be a non-issue if done correctly, but get it wrong and people end up disappointed. In some situations, conflict can arise.
Surveys indicate that pay is not one of the top reasons why people will leave employment, but it can be a contributing factor.
Farm owners and managers should consider having an open discussion about compensation. Ideally, an outcome would be to come up with a plan that outlines how people will be compensated.
Compensation is generally in the form of pay, but there can be other forms as well.
Designing a compensation plan for a farm family business brings up the following questions:
- What is fair pay among family members?
- How can a fair wage for family members and non-family employees be determined?
- How should shareholders be paid?
- How can disputes over pay be resolved?
- How should family assets be handled?
Farm families may find it helpful to develop a philosophy that supports the plan.
Compensation can include dividends, wages, bonuses, performance increases, loans, gifts such as housing, school, vehicles and training, and perks such as vehicles, vacations, trips and business-personal expenses).
It can also include ownership in the business and equity gains in land.
Having everyone agree on the philosophy should help make managing compensation less of an issue, keep everyone on the same page and avoid unnecessary conflict.
Here are questions that can be used to develop a compensation philosophy.
What will base wage rates be based on? Factors may include market value, equal wages for all, and perception of need.
What will be the criteria by which base rates are increased?
Options include inflation, cost of living, company performance, need and merit.
What will be the timing of wage increases?
Even if your farm is unincorporated, the concept of “dividends” can still be applied.
Will dividends be based on equity growth or net income performance?
What will bonuses be based on: seasonal, company performance, individual performance, training or education milestones?
For example, all children receive a vehicle on their 17th birthday, all children receive four years of paid education, the family will go on one annual paid vacation, interest free loans or all children will receive a set amount of money toward their first home down payment.
Check with your accountant regarding the eligibility of the business perks you are considering.
Perks could include: phones, utilities, vehicles, fuel, business trips, housing?
Will there be limits on perks?
Will all members have equal access to training?
What will be the limits to time and money spent on training?
Will training be mandatory or included in merit increases and bonuses?
When will members become owners?
How will ownership amounts be awarded or decided?
Will assets be transferred to individuals?
Will the farm make payments on personal assets?
What will be the criteria to earn an inheritance or bequest?
For more information, take a look at Farm Management Canada’s publication called Managing the Multi-Generational Farm.
It is available from www.farmcentre.com or by calling 888-232-3262.