A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
Ultra-high-net-worth individuals are increasingly using private investment firms to tap into their millennial and Gen Z successors.
In a tough job market, this is a way for younger family members to gain work experience, said family office consultant Joshua Genting. Additionally, he said, as family offices ramp up their bets on alternatives and startups, the next generation of heirs are increasingly involved in investments.
But even among the wealthiest families, pay is a pervasive topic, family office advisors told Inside Wealth.
One of the main problems, Gentine said, is that family members are paid less than non-family members. This trend is particularly evident in small family offices, he said.
Mr. Gentine, who is also a third-generation heir to Sargento Foods, said: “I think the reason families are paid less is because they are already receiving dividends or are wealthy, and the rationalization is that market-based compensation is ‘not needed’. I think this is completely wrong.”
Resentment tends to develop when families feel they are underpaid, he said, but many feel that loyalty prevents them from negotiating or working elsewhere.
“Do the next generation feel prepared to seek and negotiate further compensation for their fathers and mothers?” he asked. “It’s a strange dynamic. They may feel that if they negotiate, they’ll be turned down, or they’ll be seen as greedy. They might of course negotiate at another company, but they don’t do that in a family business.”
Those who are paid too much compared to industry standards feel like they’re in golden handcuffs and can’t quit even if they want to, he said.
Compensation disputes are common, even if they don’t make headlines, said Kyler Gilbert of Business Consulting Resources.
Mr. Gilbert, whose parents founded the company 45 years ago, advises family businesses and family offices. He said one of his clients recently closed a deal, but his uncles were withholding the promised bonus because they felt the amount was too high. The client is said to be reluctant to rebel and damage his relationship with his uncles.
Gilbert, 27, said part of the problem stems from generational expectations. When family office presidents are self-made entrepreneurs, they often use the amount earned at the age of their adult children as a benchmark, rather than current interest rates, and do not take into account the increasing cost of living.
“For many of the current generation of business owners, things are working in their favor. The market has gone up, real estate has gone up, assets have gone up,” he said. “This is great for family offices and great for family businesses, but it means everything is more expensive and compensation becomes more important.”
Family offices are also less likely to have formal structures for compensation and job responsibilities. This ambiguity leaves room for questionable practices, such as principals paying all of their peers the same amount regardless of their job title, Gilbert said.
Gilbert said it’s easier to prevent such conflicts than to resolve them after the fact. He recommends working with a compensation consultant to set salary levels and establishing a committee to mediate issues.
Trish Botoff, a compensation consultant, said conflicts are most likely to occur between peers, whether the pay is the same or different. She added that Millennials and Gen Z people are increasingly advocating for themselves.
“The new generation of leaders coming into family offices aren’t just going to say, ‘Hey, I’m going to take your word for it, and I’m going to shake your hand, and I’m going to trust you to do what I say,'” she said. “They want things to be communicated in writing. They want compensation plans to be more formalized.”
