Battling 'Outsider Syndrome' in the Family Business

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The pool and spa industry began as a family business on a grand scale, and while there has been consolidation, a great many small family businesses remain in the retail, service and building sectors. Often this is a great strength, as the family business enjoys the sense of common purpose that already unites families, and that sense of shared destiny becomes a powerful motivating force.

Family businesses can also face the unique challenge of motivating non-family workers who sometimes feel under-appreciated, ignored in company planning sessions, and overlooked for advancement into management positions.

That feeling in a company can retard incentive and ultimately, erode profits. “People who feel like ‘outsiders’ see no point in putting in 100% effort,” says Sam Brownell, founder of Stratus Wealth Advisors in Kensington, Md. “As a result, customer service can drop off, and the business can have issues with inventory management and vendor relations.”

In the worst such cases, dysfunctional family dynamics can impact retention — an especially costly issue in today’s tight labor market. “People who don’t feel their efforts and accomplishments are being appropriately rewarded have a motivation to look elsewhere,” says Travis W. Harms, the leader of Mercer Capital’s Family Business Advisory Services Group. “The worst possible thing is to lose high-performing talent to a competitor.”


Family businesses thrive when they create a work environment where all employees feel at home. “Any family business that grows at any appreciable pace will very soon become dependent on people who are not family members,” says Craig Aronoff, chairman of The Family Business Consulting Group, Chicago. “And it behooves that company to ensure they feel included rather than excluded.”

Equal treatment for everyone stems from a vital principle: The enterprise should be a “business first” rather than a “family first” operation. Here are some specific steps that will help create a work environment that stimulates productivity among all employees — family members or otherwise.

Work hard at fairness —“Non-family employees should be treated, managed, evaluated and compensated on the same basis as family members,” says Aronoff. “It’s also important to maintain clear distinctions within the family group as to each individual’s role, whether that be employee, supervisor or manager. Within each of those roles, it’s extremely important that there is perceived fair treatment of everyone, whether family or not.”

•Promote for performance — “Advancing the right person to upper management can be a complicated and difficult process,” says Aronoff. “Choosing a family member may seem to make the decision a simple one, but it’s not. It’s certainly not a way to build the best possible business, nor is it the best way to help the new generation maximize their own lives and experiences."

Successful family operations plant an early seed of responsibility. “Make clear that it’s not your genes that prepare you for a position,” says Aronoff. “Rather, it’s your knowledge, experience, drive, and how you interact with other people. The person who gets advanced into a higher position will be the best person for the job.”

•Avoid empty positions — Too often, family businesses create meaningless positions with impressive titles so members of a new generation can be brought aboard. This practice creates morale problems and saps profits.

Aronoff notes that the family member who requires career and employment help can be provided financial assistance or training opportunities outside the business structure.

•Earn stripes elsewhere — “Assigning family members without adequate experience or training to management positions can create a sense of entitlement which is frustrating for everyone,” says John Joseph Paul, a Portland, Ore.-based family business consultant. “Instead, family members should prove their mettle by working at entry-level positions in other, similar types of companies. This experience will give them the opportunity to learn practical skills.”

Many companies today require family members to bolster their credibility by gaining experience at another company for five years before joining the family enterprise.

•Communicate family business policies — Having the right family business policies is one thing. Ensuring everyone is aware of them is another.

“It can be frustrating for non-family employees if they feel like their advancement opportunities within the company are limited because a family member will eventually come in and snap up a job they’ve been working toward,” says Harms. “That’s a pretty common frustration.”

This situation can be obviated by communication. Family and non-family workers must understand the policies that govern promotions. “Clear guidelines on how the family is going to be treated personally and professionally must be clearly understood by everyone,” says Brownell. “Transparency in these things can make a huge, huge difference, because everybody will know what’s expected.”

•Maintain clear chains of command — Too often new employees find themselves juggling contradictory directives from more than one family member. This creates operational and morale problems. In the worst-case scenarios, the frustrated worker leaves for another employer.

“Family businesses must maintain robust organizational charts that illustrate clear chains of command, so that no employee ends up reporting to multiple bosses, whether formally or informally” says Aronoff. “It is the responsibility of top-level management to create a clear system of authority.”

•Distribute perks fairly — Non-family employees should share equally in company niceties such as paid-time-off, flexible working hours, and work-life balance initiatives. “If family members are given special perks, it is noticed by everyone,” says Aronoff. “And that can lead, again, to morale problems and a decline in commitment. While this kind of treatment will be accepted by some people, it will not be accepted by those who can provide the greatest return for your company.”

•Reinvest profits — One of the most critical family issues is that of financing: Will profits be reinvested in operations or distributed to family members? “Your company might have lots of exciting investment opportunities,” says Harms. “But if shareholders press for large dividend payments or share redemptions, the drain on funds can crowd out otherwise attractive projects. That can be very frustrating — especially for non-family CEOs and CFOs.”

Never mind that smart investment of profits will ultimately benefit family members. Those not intimately involved in daily operations are more likely to want immediate returns. Such conflict can become especially intense as the years go by and the family tree becomes populated with second, third, and even fourth generation members. “The number of family members can grow substantially, and everybody wants a slice of the pie,” notes Harms.

How can this situation be avoided? Nothing so complicated has a one-size-fits-all solution, but ongoing education can help. “It’s important to make sure family shareholders understand that businesses often grow by heavily reinvesting earnings,” says Harms. “A dollar distributed or used for redemptions is a dollar that’s not available to make the business succeed.”

•Share your success — Equitable pay and promotions are one thing. But who benefits financially when the business becomes more valuable as a result of employee performance? Too often, the answer is only the family members who own part of the company. Employees who lack equity also lack the ability to participate financially in the upside. That can lead them to jump ship, taking their skills to competitors.

What’s the solution? Just like publicly traded companies, privately held companies can have shares of stock that not only represent ownership control, but also facilitate the allocation of financial rewards through share appreciation and dividends. Harms says that it’s wise to set in place a financial vehicle that channels such financial rewards to non-family executives through equity-like compensation, while allowing family members to retain operational control.

A number of vehicles are available to accomplish this task. One of the most common is a profit-sharing plan, but there are others such as classified and phantom stock. Additionally, an Employee Stock Ownership Plan (ESOP) can channel appropriate compensation to executive and non-executive employees alike. While delving into the details of such vehicles is beyond the scope of this article, family businesses can seek further information from their attorneys and accountants.

Family businesses that follow the aforementioned guidelines will ensure their entire teams maintain good morale while remaining invested in the success of the enterprise. “There are many ways to show non-family members that you care about their contributions,” says Brownell. “Everyone will perform better when they understand their labor is going toward something greater than just the net worth of the family.”

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