Ultra-rich families are increasingly involving millennial and Generation Z heirs in their personal investment firms, known as family offices.
This strategy provides younger family members with job experience, especially in a competitive job market, according to family office consultant Joshua Gentine. Gentine also noted that there are growing opportunities for next-generation heirs to participate in investing as family offices increase their focus on alternative assets and startups.
However, compensation within these family offices is a complex issue, even among affluent families, advisors reported. A primary concern, as identified by Gentine, is that family members often receive lower salaries compared to what they would earn in non-family roles. This trend is particularly evident in smaller family offices.
Gentine, a third-generation heir to Sargento Foods, stated that family members are often paid less based on the assumption that they already benefit from dividends or possess high net worth, negating the need for market-based compensation. He disagreed with this justification.
Underpayment can lead to resentment among family members, who may feel unable to negotiate or seek outside employment due to loyalty, Gentine explained. He questioned the dynamic of a next-generation heir asking parents for more compensation, noting that they might fear rejection or appearing greedy, despite being willing to negotiate in other companies. Conversely, those who are overpaid relative to industry standards may feel restricted from leaving, a situation described as 'golden handcuffs,' Gentine added.
Kyler Gilbert of Business Consulting Resources reported that compensation disputes are common, even if not openly discussed. Gilbert, whose parents founded his firm 45 years ago, provides advice to family businesses and family offices. He cited a client whose uncles withheld a promised bonus after a deal closure, deeming the amount too high. The client was reluctant to challenge this to avoid damaging family relationships.
Generational expectations contribute to the problem, Gilbert, 27, indicated. Self-made entrepreneurial principals often use their earnings at their adult children's age as a benchmark, disregarding current market rates and the increased cost of living. Gilbert explained that favorable market conditions, real estate appreciation, and asset growth have benefited current-generation business owners, but also mean higher expenses and increased importance of compensation for younger generations.
Additionally, family offices frequently lack formalized structures for compensation and job responsibilities. This lack of clarity can result in problematic practices, such as principals paying all members of a generation uniformly, irrespective of their duties, Gilbert noted.
Gilbert suggested that preventing these conflicts is more effective than resolving them post-occurrence. He advised utilizing compensation consultants to establish salary levels or forming a committee to mediate such issues.
Compensation consultant Trish Botoff observed that conflicts are most likely to emerge among members of the same generation, regardless of whether their pay is identical or varied. She also noted that millennials and Generation Z are increasingly advocating for their compensation. Botoff stated that the new generation of leaders entering family offices desires written and formalized compensation plans rather than relying on verbal agreements and trust.