A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
Ultra rich families are increasingly using their personal investment firms to bring millennial and Generation Z heirs into the fold.
In a tough job market, it’s a way for younger family members to get job experience, according to Joshua Gentine, a family office consultant. Further, there are more opportunities for next-generation heirs to get involved in investing as family offices step up their bets on alternatives and startups, he said.
However, even among the wealthiest families, the issue of salary is a loaded topic, advisors to family offices told Inside Wealth.
One of the chief issues, according to Gentine, is that family members typically get paid less than they would if they were not a member of the family. This trend is especially pronounced for smaller family offices, he said.
“I think family is paid less because there is this idea that they are already getting dividends or have a high net worth, and so the justification is made that they ‘don’t need’ a market-based comp. I think this is totally wrong,” said Gentine, who is also a third-generation heir to Sargento Foods.
When family members feel underpaid, it tends to create resentment, but many feel powerless to negotiate or work elsewhere due to feelings of loyalty, he said.
“Does a next gen feel equipped to ask dad or mom for more compensation and to negotiate?” he asked. “That’s a strange dynamic. They might feel that if they do, they will be turned down or they will look greedy. They might negotiate in any other company — as they should — but in their family business they don’t.”
As for those who are overpaid relative to the industry standard, they feel they have golden handcuffs and cannot leave even if they would like to, he said.
Disputes over compensation are common, even if they aren’t aired out in the open, according to Kyler Gilbert of Business Consulting Resources.
Gilbert, whose parents started the firm 45 years ago, advises family businesses and family offices. He said one of his clients recently closed a deal but his uncles are withholding a promised bonus as the figure felt too high. The client is reluctant to push back and damage his relationship with his uncles, he said.
Part of the problem stems from generational expectations, said Gilbert, who is 27. When the family office principal is a self-made entrepreneur, they often use what they earned at their adult children’s age as the benchmark rather than the going rate and do not consider the increased cost of living.
“For a lot of current-generation business owners, things have worked in their favor. Markets have gone up, and real estate has gone up, and assets have gone up,” he said. “It’s great for family offices and great for family businesses, but it means that everything’s more expensive and compensation is more important.”
Family offices are also less likely to have formalized structures for compensation and job responsibilities. This ambiguity leaves room for problematic practices such as the principals paying all members of one generation the same amount regardless of their duties, Gilbert said.
It’s easier to prevent these conflicts than resolve them after the fact, according to Gilbert. He recommends working with compensation consultants to set salary levels or even establishing a committee to mediate issues.
Compensation consultant Trish Botoff said conflict is most likely to arise among members of the same generation, whether they are paid the same or differently. She added that millennials and members of Generation Z are increasingly advocating for themselves.
“The new generation of leaders coming into family offices are not willing to just say, ‘Hey, I’ll take your word for it, and you’ll shake my hand and I’ll trust that you’re going to do what you said you did,'” she said. “They want things in writing. They want compensation plans more formalized.”