Imagine this situation.  A family has 3 siblings, 1 of whom is active in the business.  How do the parents overcome the potential of a perceived inequity when it comes to compensation of the siblings.  It is not uncommon in a family business where the parents want to treat all siblings exactly the same, meaning that they each receive the same amount of “compensation” from the business.  In some families, compensation can be defined as including salary for work performed + dividends being the return on the shares owned.

This is a challenging and often slippery slope to set such a precedent.  Here is a best practices and possibly better plan of action for sibling compensation.

Set two policies and more importantly, communicate and review these policies regularly with your family members:

1. salary policy – whoever is working in the business, family or non-family, should be compensated at fair market value for their services provided.  There are no free rides so if a person is not working in the business, then no salary is paid.

2. dividend policy – a regular and planned approach should be set out to dividends.  You want to remove the ad hoc nature of dividends so that family members, whether or not active inthe business, could have a level of expectation of a return on the shares owned.

These policies should reflect your unique family values around compensation and what is considered to be `fair`.

Once these two policies have been set, discussed and implemented, then set a time in the future (1-2 years) to reconsider these policies and adjust as needed.  The above is a best practice outline for consideration.

Learn, consider, apply!