Children in the Family Business: What is Fair Compensation?

Over the years, in our work with many family businesses, one question comes up repeatedly: how much should you pay your children if they work in the family business? On the surface, it seems like a simple compensation issue. In reality, it sits at the intersection of money, emotion, fairness, and succession planning.

In many family businesses, the children are paid below market rates. When we ask the parents why, the answers are often along the lines of “The business will eventually belong to them,” or “Why should we pay them a full commercial salary now when they will inherit the company later?” From their perspective, it feels logical. Every dollar saved in salary can be reinvested to grow the company, strengthening the asset that their children will one day own.

There is also a concern about fairness within the organisation. Parents worry that paying their children too much may demoralise other employees. They want to avoid the appearance of favoritism. After all, a family business must still operate as a real business. Standards, discipline, and accountability matter.

These concerns are valid. Overpaying family members simply because they are family can undermine professionalism. However, in our experience, the more common problem is not overpayment but underpayment.

A key reason for this lies in how business owners view their children. Even when their sons or daughters are adults who have been managing the business and contributing meaningfully for a number of years, parents often still see them first as their children. This is natural.  

There is often an unspoken assumption: the future inheritance will make up for any shortfall in current compensation.

But this thinking can create long-term problems.

Firstly, it blurs the distinction between two separate roles: employee and future owner. When a child works full-time in the business, they are performing a job. That job has a market value. If the business had to hire an external professional to fill the same position, it would likely pay a competitive salary. Paying a family member significantly less for doing the same work can unintentionally signal that their contribution is worth less.

Secondly, inheritance is uncertain and distant. Ownership transfer may happen many years later. Circumstances can change. Business conditions can shift. A promised future stake does not help the child meet present-day financial responsibilities, such as housing, family expenses, or personal financial planning. If they consistently earn below their peers in similar roles, resentment may quietly build.  In reality, in many families the children do not have any idea what percentage of the business they will eventually inherit (as their parents are hesitant to share this information with their children).  For one of our families, this lack of transparency even prompted some of their children to consider setting up their own side businesses so that they could have some reassurances about their future.

Thirdly, underpaying children can weaken governance within the company. When compensation is not tied clearly to role and performance, it becomes harder to maintain professional standards. Are expectations clearly defined? Or are decisions influenced by parental instincts rather than business logic?  Many children (unlike non-family staff) do not even receive performance reviews. Over time, the children often become unmotivated and uninterested.

The most successful family businesses we have encountered draw a clear line between employment and ownership.

As employees, children are paid according to market benchmarks. Their roles are clearly defined and there is a clear remuneration framework.  Compensation reflects responsibility, experience, and performance — just as it would for any non-family executive. This approach promotes fairness, both within the family and across the organisation. It reassures non-family staff that merit, not bloodline, determines salary.

Ownership, on the other hand, is addressed separately through structured succession planning. Shares may be transferred gradually. Trusts may be established. Dividend policies can reward shareholders appropriately. In this way, long-term wealth transfer is handled deliberately and transparently, without distorting employment compensation.  Children who are both employees and shareholders receive more (and fairly) as compared to children who are merely shareholders.

When parents begin to consciously shift their mindset — seeing their adult children as professional colleagues rather than simply as daughters and sons — the dynamic changes. The next generation feels respected. Accountability improves. Communication becomes clearer. The business benefits from stronger governance, and family relationships are less strained.

In the end, it is essential to strike a balance. Paying too much can create entitlement. Paying too little can breed frustration. A fair, market-based salary commensurate with the amount of current work and responsibilities, combined with a thoughtful plan and early communication of future ownership, tends to produce the healthiest outcomes.

When employment and inheritance are treated as distinct matters, both the business and the family stand a better chance of thriving together.