When the super-rich employ family members, what to pay them can be difficult

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

Ultra-wealthy families are increasingly using their personal investment companies to bring millennial and Gen 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 Gentin, a family office consultant. Moreover, there are more opportunities for next-generation heirs to participate in investing as family offices increase their bets on alternatives and startups.

However, even among the wealthiest families, the issue of salary is a charged topic, family office advisors told Inside Wealth.

One major issue, according to Gentin, is that family members typically receive lower salaries than they would have if they were not a family member. This trend is particularly evident for small family offices, he said.

“I think families get paid less because there’s this idea that they already earn profits or have a high net worth, and so the justification is given that they ‘don’t need’ market-based businesses. I think that’s completely wrong,” said Gentin, who is also a third-generation heir to Sargento Foods.

When family members feel underpaid, it tends to create resentment, he said, but many feel powerless to negotiate or work elsewhere because of feelings of loyalty.

“Does the next generation feel prepared to ask Mom or Dad for more compensation and negotiation?” he asked. “It’s a weird dynamic. They may feel that if they do that, they’ll be rejected or look greedy. They might negotiate in any other company — as they should — but in their family company they don’t.”

As for those who are overpaid compared to industry standards, they feel like they have golden handcuffs and cannot leave even if they wanted to, he said.

Disputes over compensation are common, even if they are not made public, according to Keller Gilbert of Business Consulting Resources.

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 are withholding the promised reward because the number seems too high. He said the client was reluctant to back down and damage his relationship with his uncles.

Part of the problem stems from generational expectations, said Gilbert, 27. When a family office manager is a self-made businessman, he often uses what he has earned over the lifetime of his adult children as the benchmark rather than the going rate and does not take into account the increased cost of living.

“For a lot of current generation business owners, things have worked out for them. Markets have gone up, real estate has gone up, assets have gone up,” he said. “It’s great for family offices and great for family businesses, but it means everything is more expensive and compensation is more important.”

Family offices are also less likely to have formal compensation and job responsibilities structures. Gilbert said this ambiguity leaves room for problematic practices such as school administrators paying the same amount to all members of a generation regardless of their duties.

It’s easier to prevent these conflicts than to resolve them after the fact, according to Gilbert. He recommends working with compensation consultants to determine salary levels or even creating a committee to mediate issues.

Compensation consultant Trish Botoff said conflict is more likely to arise between members of the same generation, whether they are paid the same or differently. Millennials and members of Generation Z are increasingly advocating for themselves, she added.

“The new generation of leaders who are 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’ll do what you said you did,’” she said. “They want things in writing. They want compensation plans formalized.”