The Benefits of Maintaining Wages for Family Members.
Throughout 2023, we’ve seen on farm costs continuing to rise with inflation and interest rates, and overall returns year-on-year remain down. In times like this, we often see a reduction in wages for family members working on farm as a way to manage cashflow during a tough time. While we are big advocates for cashflow and profitability, we believe that maintaining the wages of family members is crucial to succession planning success. A family farm ownership structure has the ability to be nimble and agile as seasonal conditions change. This is often seen as a positive in comparison to a corporate operation and reducing wages when cashflow is tight can be tempting for family run operations. In comparison, corporate operations face more challenges to reduce costs to increase cashflow, due to higher fixed costs including wages. Reducing wages for family members in tough times links back to the Australian farming culture of ‘doing your time’ to obtain ownership of the farm. In today’s world, this culture can create disunity within family units, particularly as they start succession planning.
Compensation Systems for Sound Succession Outcomes. It’s important for family farming operations to develop compensation systems, to ensure a smooth succession transition. Looking back, 15 years ago when there was a long stretch of drought known as the millennial drought, many family members returned home and worked for next to nothing. These family members are now in their 30’s and 40’s and there is often a level of expectation around farm ownership that was set when they returned to work 15 years ago. At the time, expectations were set, and decisions were put in place quickly and now, many family farming operations are working to untangle these decisions.We acknowledge that decisions are made to juggle cashflow, and paying a minimal wage or no wage at all to family members can seem like a solution at the time. However, our recommendation is to continue to pay family members the full market rate even when cashflow is tight to avoid confusion around compensation and potential expectations of the future ownership of the farm.
Sweat Equity in Farms.
The concept of ‘Sweat Equity’ refers to the value of work performed in lieu of payment. It suggests that the amount not paid per year (under market value), may be their equity in the future. It’s important to understand that when you pay family members lower than the market value as a business owner, you may unintentionally set an expectation around future ownership that can cause issues in the future.
Tips for Fair Farm Compensation.
Develop an overarching policy about family members in your operation that should include the following:
- How family members enter and exit the business, linking this to future ownership.
- A clear compensation plan that will enable to you to retain key people in the business.
- A plan for how family members will receive feedback.
- Standards and expectations for family values.
- Have clear employment contracts, outlining expectation and performance with detailed job descriptions.
- Develop operating manuals to illustrate ‘how things are done around here’.
