Oh Brother – Hiring Relatives

Author: Larry Chester, President

Probably one of the greatest challenges facing any business is that of staffing and growth. Are you strategic and hire people in advance of the absolute need, or do you wait till the company is struggling to achieve its goals before you add to your pool? And even more so, do you hire people who are experts in their area (and therefore pay significantly more) or do you hire someone who will grow into their position? It becomes even more complex when there are family members who want a piece of the pie.

Many mid-market companies are family oriented. Some companies become a family affair, and as the business passes from one generation to the next, more and more of the family get involved in its operation. The decision of whether to hire relatives is complex and fraught with conflict. Will they solidly contribute to the betterment of the company, or did they climb aboard the gravy train just to have a comfortable ride? Sometimes the answer is obvious, sometimes it only becomes apparent on the heels of major company change.

• Business – Cosmetics company specializing in hair care products
• Location – Little Rock, AK
• Sales – $72 million
• Ownership – Husband and wife

Initial Contact –

The business had grown significantly since its inception. From a local brand, they had expanded not only across the country, but into Europe, Africa and South America. The owner, who was very family oriented, had hired many relatives to lead the various departments and divisions of the company. Each was independently run by the various family members, with overall direction and financial control by the company CEO. When the founder suddenly passed away, leadership was given to the number 2 son, who had previously been involved in the marketing of the company’s products. With the father’s financial controls no longer in place, the company had gotten into financial trouble.

Significant Findings and Recommendations:

Staffing and Payroll

When the patriarch passed away, there was a lot of scrambling for position. His wife named her most accomplished son as President. He had never previously had a role with that much responsibility, and the many family members took advantage of his inexperience by telling him that his father had promised significant raises for all of them prior to his passing. As a result of the other operational pressures he was facing, the new president agreed to the raises, putting a large additional financial burden on the company.

Recommendations

• Evaluate current staff. It was important that every employee be evaluated to assure that they were effective in their jobs. First, job descriptions needed to be confirmed for all management and supervisory positions. Then a review needed to be completed on how each employee – especially family members – were contributing to the company’s needs and goals.
• Establish regular performance reviews. As a pioneering company in their market segment, the company gained success easily in its early years. With increased competition, profitability had suffered, and now each family member had to show the contributions they were making to the bottom line.
• Determine proper salary for each position. Since salaries had largely been set for family members based on their relationship with the founder, an industry correlated compensation plan needed to be created, and each employee’s wages reset so that they fell within the accepted industry standard. Bonuses should be tied to individual performance; not overall company gains.

Succession Planning

Before the loss of the founder, there were no plans made for who would direct the company when he was gone. Now the gap was painfully obvious. He hadn’t taken the time to train his son to take over in the event of his untimely death. The company needed to make some decisions about who was going to run the company not just for the short term, but in coming years, and future generations. The issue became whether the family was going to become a passive investor or remain active, managing the family’s primary asset.

Recommendations

• Since the new president was inexperienced at running the company, the family should hire an outside executive to run the company for at least a year or two, putting the company back on track, and training the new President along the way. This would quickly put the company on a path to recovery and provide the family’s company with solid, experienced direction.
• A family council should be established so that the major decisions on the company’s future would be made by an internal board of directors and not just a single individual. This would broaden the company leadership, and not confine the future of the company to a single individual.
• The family should develop future generations well before they are needed. Summer internships for high school and college age family members would pique their interest in the company. Entry level positions for those with management ambitions should give them experience in each aspect of running the company, from sales to manufacturing and from finance to HR.

Running a company that you’ve built from the ground up is difficult, and it doesn’t necessarily become easier over time. But making plans to exit can be even more difficult. These plans should be made over a period of years, not overnight. Usually though, it is some event that forces a change in management. Whether the CEO suddenly dies, or there is some other event that causes an abrupt change of direction, the result is still the same. The company hierarchy and operations are thrown into unfamiliar territory.

With a family-owned business, these changes impact not only the company, but the family dynamic as well. A relative that is well liked isn’t necessarily the one that should be making the decisions about how to operate the family’s livelihood. These are pragmatic decisions that need to be thoughtfully made. And the best plan is likely one that is laid out by the hierarchy of the family, many of whom depend on the company not just for their weekly salary, but for their long-term financial future as well.