The writer speaks on equal distribution of profits in a family business, despite unequal contribution by members
If you had a trillion US Dollars, you would give it to me for sharing this one statement with you “Unequal contribution but equal distribution” conceived, crafted and delivered by Prof John Ward, Harvard family business guru: a thorough understanding of the statement will actually help in assimilating it and implementing it.
What is unequal contribution? Especially when it comes to sharing the profits in a family business, which is what this article is all about.
Before I begin with my point of view, let me ask you a question.
If there are two siblings offering their inputs to a family-business, both putting in their full-time efforts to strengthen various aspects of the business, but their tangible contribution to the organisational bottom-line differs, do you feel:
a. They should be given compensation in relation to the results, their efforts and inputs provided.
OR
b. Their monetary rewards should be the same, as long as their commitment, efforts and the time that they put in are similar, if not the same?
It is a tough question to answer, as all such philosophical questions normally are.
Different people, based on their experiences and mindsets, will definitely differ.
However, answers have to be given; as such, situations do arise in real life. In addition, they arise quite often.
If family members have contributed different amounts as capital or working capital, then they may get a share of profits in proportion to their capital contribution – that is fine and can be understood.
As the adage goes, no two thumb impressions are the same, we are all unique, distinct human beings, we bring different facets to the family business. But when two family members are working in a family business, with different skills, qualifications, experience, business acumen, their contribution to the totality of the business is different, it is very difficult to measure it, quantify it and hence it is a tough call to quantify as to who is contributing more or less and has a larger or lesser impact on the business.
Taking the example of the game of cricket, with which we as Indians are mostly familiar, some are great bowlers, some are excellent wicket-keepers, some are batsmen who are very good at opening the innings, but maybe these same batsmen cannot work under pressure to win or close a match on a victorious note. All players in the team must and should receive the same emoluments. That is exactly how it works.
The salary and other perquisites of two or more members of the family members engaged in the family business with similar levels of responsibilities must be on par, even if the individuals are part of different organisations but belong to the same group; must be the same. The minute differentiation sets in; a whole can of worms emerges.
If the members of the governing family are working alongside in the same office, the staff members will always be watching how they treat each other. Relations among them will be the subject of discussion and grapevine.
So apart from the fact that the family member who is put at a disadvantage would himself or herself be feeling slightly let-down, the relations within the family will also be subject to scrutiny, and in such cases, the reputation of the entire family could take a beating as one which is not able to get along with itself. This could be disastrous for the business in the long or even in the mid-run. There have been umpteen cases wherein the best employees quit an organisation when they see the first signs of a sinking ship, and often the first sign is discontent among the management team becoming visible and apparent to people down the line of hierachy.
Directors of companies where the top team is closely knit send out strong verbal as well as non-verbal signals that they are all on the same page. Not only does this reassure employees that all is well, but also sends out positive signals into the marketplace, among suppliers, customers, and other stakeholders who matter.
For example, they all usually buy a new company car of the same brand for themselves, but may be of a different colour to signal their individuality. I have personally known of a leading family business in India, where even the wives or daughters-in-law get the same budget for jewellery purchase once a year.
Taking the example of my own family business, one technical director, based in New Delhi, the Finance Director in Kolkata, and the Chairman and Managing Director based in Mumbai. All three of these senior directors being brothers holding different but equally important portfolios, and each of them always took the same salary. If one of them were to state, as an example, that the north region or the east region was getting or contributing more sales, more revenue or more profit to the overall organisation, then the story of the organisation would long have been over.
However, thankfully, such has not been the case. We are proud to state that we are moving now into the 4th generation of family business and are stronger than and as united as ever before.
Sticking together in sunny days and rainy days is critical. Families that stick together during difficulties are the happiest of families, and this holds true for business families, as well. Such families will witness their businesses continue to grow and flourish. My father, Robert Henry Mendonsa, once called four of his siblings to his cabin. Once inside, he took out a small matchbox. Then he carefully removed one match and broke it in the centre. Then he took two more, and with a little force and pressure, he broke those too. Then he looked up and saw that we were eight of us totally in the room. He then arranged eight matches together neatly and tried to break them – but no, it was not possible. His subtle message was ‘stick together through thick and thin.’
The author is Director, Marketing of Lawrence and Mayo, a family owned business. He is a passionate entrepreneurial enthusiast and mentors and advises various early stage businesses and mature family businesses. Email: vivekm@lawrenceandmayo.co.in
