A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
Ultra-wealthy families are increasingly using their personal investment companies to onboard millennial and Gen Z heirs.
In a tough job market, it’s a way for younger family members to gain work experience, according to Joshua Gentine, a family office consultant. Additionally, there are increasing 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 question of salary is a sensitive topic, family office advisors told Inside Wealth.
One of the main problems, according to Gentine, is that family members are generally paid less than if they were not family members. This trend is particularly pronounced for smaller family offices, he said.
“I think the family is paid less because there is this idea that they are already receiving dividends or that they have a high net worth, and therefore it is justified that they do not need market-based compensation. I think that is totally false,” 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 because of a sense of loyalty, he said.
“Does a new generation feel equipped to ask for more compensation from mom or dad and to negotiate?” he asked. “It’s a strange dynamic. They might feel like if they do, they’ll be turned away or look greedy. They could negotiate at any other company – as they should – but at their family business, that’s not the case.”
As for those who are overpaid by industry standards, they feel like they have golden handcuffs and can’t leave even if they want to, he said.
Disputes over compensation are common, even if they are not openly discussed, according to Kyler Gilbert of Business Consulting Resources.
Gilbert, whose parents founded the firm 45 years ago, advises family businesses and family offices. He said one of his clients had recently closed a deal, but his uncles were withholding the promised bonus because the figure seemed too high. The client is reluctant to respond and damage his relationship with his uncles, he said.
Part of the problem is generational expectations, Gilbert, 27, said. When the family office manager is a self-made entrepreneur, he often uses as a benchmark what he earned at the age of his adult children rather than the going rate and does not take into account the rising cost of living.
“For a lot of today’s generation of business owners, things have worked in their favor. Markets have gone up, real estate has gone up and assets have gone up,” he said. “It’s great for family offices and for family businesses, but it means everything is more expensive and the compensation is greater.”
Family offices are also less likely to have formalized structures around compensation and job responsibilities. This ambiguity leaves room for problematic practices such as principals paying the same amount to all members of a generation, regardless of their positions, Gilbert said.
It is easier to prevent these conflicts than to resolve them after the fact, according to Gilbert. He recommends working with compensation consultants to set salary levels or even creating a committee to arbitrate issues.
Compensation consultant Trish Botoff said conflicts are more likely to arise between members of the same generation, whether they are paid the same or differently. She added that millennials and members of Generation Z are increasingly standing up 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, 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 to be more formalized.”