Employee Evaluations and Promotions in the Family Firm Originally published in The Family Business Compensation Handbook, October 2001, by Family Business Magazine." By Margery Engel Loeb Evaluating employee performance and making decisions about promotions are more difficult when some employees are also family members. A formalized employee performance appraisal system is a valuable management tool that can help bring objectivity to the process. Performance standards that are applied uniformly strengthen employee morale, enhance productivity and help avoid strained family relationships. Family businesses that use employee performance management systems are forced to resolve some of the inherent conflicts that exist when family and business are combined. Successfully addressing personnel issues may help the family-owned business survive beyond the first generation. The following elements of a well-designed performance management system can improve families and their businesses. Job descriptions Clear job descriptions help select the right person for a job and set expectations for performance. It’s important that the employee be given all the necessary information to perform the job and understand how it relates to the company’s mission and values. Business values should be explained behaviorally in relation to the particular tasks involved. How job performance will be measured also must be discussed. Measurement should be based on behavior that’s within the employee’s control and should focus on the company’s goals, not just what’s easy to document. Using job descriptions in recruiting and in measuring performance suggests that positions will be awarded based on merit and accomplishments, not family membership. Job descriptions also create a vehicle for conveying the original vision and values of the family and founder and institutionalizing them for future generations of family and non-family workers. Supervision If at all possible, non-family members should supervise and evaluate family members. A good supervisor gives feedback throughout the year so that performance reviews never contain surprises. Ongoing dialogue between supervisors and employees helps focus on goals, optimize productivity and enhance morale. A family member is usually the most difficult employee to be reviewed. Family members often are tempted to use their informal network to circumvent their direct supervisors. While resentment of family members’ special circumstances can cause some professional managers to be unfair in their appraisals, most non-family supervisors bring objectivity and fairness to the process. A non-family supervisor can be comfortable giving corrective feedback when owners confer authority and support and the supervisor is viewed as fair-minded. Most family companies that allow family members to supervise and evaluate their relatives find that little actual supervision occurs. This generally fosters a more reactive situation in which issues are dealt with only when they become serious problems. On the other hand, an empowered non-family professional can be invaluable in supervising and training a family employee. For example, the owner of a welding supply distributorship in South Texas successfully used a non-family manager to supervise and groom his son. When the owner’s son joined the company immediately after college, he was placed at a branch facility. The branch manager was given responsibility for the son’s training and supervision. This trusted employee was empowered to be as tough as necessary. He was motivated to do so because he was informed that one day the son would become his boss-and if he didn’t do a good job of training, he would have to put up with an authority figure that was ill suited for that position. To this day, the branch manager takes pride in the important role he had in creating the company president the son eventually became. Supervisory training Training for those who evaluate employees is imperative for effective appraisal systems. Supervisors must be competent in observing others’ behavior, coaching and mentoring on an ongoing basis to facilitate skill development, setting goals, and communicating in a straightforward manner. Such interaction between the supervisor and employee helps ensure that the goals and objectives of both the individual and the company are met. Supervisors should present corrective actions clearly so the employee knows what behavior to change. Effective performance evaluations can raise productivity for all employees and increase the respect they hold for each other. Evaluation that’s applied effectively and objectively to family and non-family employees results in a culture in which everyone feels valued. Consequences of poor performance Effective performance management is a results-driven system. Employees should see a correlation between discussions with their supervisors and direct actions. If an employee-even a family member-isn’t performing to expectations, action should be taken. Transfer to a more appropriate job or additional training may be needed. Dismissal of any low-performing employee may be necessary for the overall good of the company and, ultimately, for the owners. A company’s failure to cull low-performing employees discourages higher performers and hinders the overall productivity of the business. Many owners and managers are pleased to find that morale actually improves when less-than-optimal performance is not accepted and is either changed or removed. It’s important that owners be very clear on this issue with family and non-family employees and supervisors. When standards of performance are established at the time of employment, employees are less likely to feel unfairly singled out. Families find it easier to establish and administer performance standards when they have decided that the rewards of business ownership are dividends and the growth of assets and that employment must be based on merit. Compensation Most family business advisors recommend that compensation for all employees be tied to the market value for that position. This allows family members and employees alike to consider carefully their career goals and set them realistically. When compensation ­is linked to performance, both family and non-family employees have incentives to work at an optimal level. If earning at a higher level is important, they are motivated to continue training and education. How compensation is handled also impacts the ability of the business to retain high-performing non-family employees. Many families in business value equality instead of equality of opportunity. Businesses that pay all family members the same or inflated salaries sometimes find this encourages mediocre performance. As capital is needed to expand and grow a business, inflated family salaries or bonuses can be very counter-productive. Professional managers and other employees whose compensation is tied to financial success can become very resentful when family members’ salaries are creating an insurmountable financial obstacle. Dividends or other appropriate means can compensate ownership. This approach also helps lessen the conflict between working and non-working owners. Promotions Goal-setting and continuing education need to be part of the performance evaluation process to ensure employees are granted access to desirable career tracks. All too frequently, family and non-family employees are promoted because they do an excellent job in their present positions but lack the skills and training for their new situations. Owners’ expectations that a family member will be promoted need to be communicated to those responsible for this person’s supervision. Non-family employees are able to accept grooming of a family member for a certain position as long as the individual earns the respect of his co-workers. Family and other long-time employees must accept that companies sometimes need to bring in outside talent to grow to the next stage of business development. Family vs. business values In the beginning, many families use the same values to operate the business and the family. Compensation may be based on family values of need or equality, as opposed to the business value of merit. Likewise, promotions for family members may be based on birth order or gender, rather than on skills. As the family and business grow, these decisions can have a negative impact on business growth as well as on the emotional health of family members. Poor job performance measurement coupled with unrealistic compensation can contribute to family members’ financial dependency on the family firm. Businesses that implement realistic performance measurement and compensation methods for family members also lessen the temptation to work in the business for the non-productive reason of reaping the benefits of ownership. Family business owners who have developed a dependency on the business as the only way to maintain their lifestyle can hinder the family’s decision-making ability on issues such as selling the business. Many times, outside advisers are needed to help the intertwined family and business make important value and cultural shifts. Strategic planning for the business often identifies a gap in culture and values that will hamper continued growth. Families are able to shift their viewpoints concerning how the family relates to the business when they’re able to recognize that what used to be effective now has become a detriment to the financial well-being of the family. Business families that are able to make the leap to performance management systems must be able to create appropriate boundaries separating membership in a family, benefits of ownership and employment. These families are flexible and able to communicate and, ultimately, to grow. A business owned by such a family receives the support that’s necessary to compete and thrive. The family benefits from the ownership of a viable asset and from the knowledge that they’re able to work together and compromise for the greater good of all. Having a performance management system is an important step in creating a business that can survive and thrive over multiple generations of owners. Margery Engel Loeb, president of Loeb & Associates LLP, Victoria, Texas, consults on a variety of issues related to transition, change, communication and planning. She is the editor of Family + Business, a newsletter that addresses the needs of families in business. She also conducts research on issues related to retirement and CEOs in family businesses.

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