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The Role of Compensation in Family Business CEO Succession Planning

Leadership transitions are rare for family-owned and founder-led organizations. When they do occur, compensation often arises as an unexpected pain point. That’s because the majority of family businesses – who may not have had to hire an executive in decades – take an outdated approach to compensation. As a result, many family businesses struggle with below-market compensation – which can undermine their succession plans.

Here's what family businesses need to know about developing competitive executive compensation packages that attract top talent and align with ownership values.

Why Family Businesses Struggle with Compensation

It isn’t uncommon for family businesses to maintain compensation models from the 70s and 80s, where base salaries are fixed at below-market rates and compensation decisions are unstructured and discussed behind closed doors. Today, market-appropriate compensation, transparency and structure are the norm – so top talent often rejects those who cling to an antiquated compensation model.

The harms of this approach are compounded by the fact that many family business executives are long-tenured employees. This phenomenon, sometimes referred to as “long-termism,” often leads to compensation complacency. Families rarely adjust executive compensation packages to align with market rates. This means executives are often underpaid and families have a false sense of what appropriate compensation looks like.

The Importance of Getting Compensation Right

When family businesses fail to update their compensation practices prior to hiring a successor, a lot can go wrong. Below-market packages typically don’t attract the best-qualified candidates, which means the business may be forced to onboard (or inboard) an individual who lacks the credentials, temperament, vision and values needed to thrive in the role.  

The wrong placement can sow chaos and expose both the organization and family to financial and reputational risk. Any resulting damage can threaten the livelihoods and reputations of employees and shareholders – and set the business back for years.

Because of this, it’s the business owner’s responsibility to appoint the leader who is best qualified for the role, regardless of whether they come from within the family or outside of it.  To entice top performers – and land the most qualified individual – compensation must be competitive and informed by market data. 

How to Build a Succession-Ready Compensation Strategy

Here are four strategies family businesses can use to design compensation policies that support their succession plans:

1. Conduct Regular Compensation Benchmarking

Family businesses should review compensation at the board level, ideally through a formal compensation committee. To keep compensation competitive, it is recommended that the committee annually review industry standards for similar roles and regional compensation norms.

2. Eliminate Family-Controlled Discretionary Compensation

Today's executives expect clear guidelines about how their performance will be measured and rewarded. To meet this expectation, organizations should have structured, transparent bonus policies in place.

3. Implement Performance-Based Succession Incentives

A competitive compensation package is a powerful tool that family businesses can use to establish expectations and set milestones for their new placement. Structured bonus policies incentivize new leaders to meet performance goals – and allow them to demonstrate they are the right person for the job.

4. Make Strategic Compensation Compromises for Long-Term Success

Family businesses may need to make concessions when it comes to compensation. This requires a strategic approach, wherein families must understand their compensation limitations and identify which roles truly require top-tier talent.

About Stranberg

Family-owned and founder-led businesses trust Stranberg to ensure leadership continuity by identifying what is needed for the next generation of CEOs and executives and who is best qualified to fill those roles. Grounded in the values that define your family and business, Stranberg’s founder and family business CEO succession planning and family business executive search services help you get leadership-level hiring right the first time.

Whether the right fit is a family member, an internal candidate, or an external placement, we prioritize aligning leadership decisions with your business’s unique culture and vision. By deeply understanding your organization, holistically assessing candidates, and navigating common pitfalls, Stranberg places leaders who embody your values and are ready to fulfill their responsibilities – ensuring your business thrives for generations to come.