Merit or Inherit: How to Approach Succession in a Family Business

“Some people are born on third base and go through life thinking they hit a triple.” This quote, often attributed to NFL football coach Barry Switzer, perfectly captures what many people think about family businesses. Family members are given jobs, promotions, and salaries that they would never have achieved without their name being on the front door. As one non-family executive put it, “He’s the COO of the company — the child of the owner.”

One of the most critical questions facing family businesses is how to treat the next generation. They are clearly different from other employees, as current or potential owners of the company, whose wealth and reputation are on the line. On the flip side, most parents rightfully worry that providing too many unearned advantages undermines not only the next generation’s work ethic, but the soul of the company. In answering this question, families often default to one extreme or another: giving the next generation special treatment that doesn’t hold them accountable to the same standards as other employees (the “inherit model”) or requiring them to earn everything they get (the “merit model”). In my experience, a path that blends elements of both is far more likely to set family members up to succeed.

The Risks of Inherit or Merit

When roles are given rather than earned, it often creates an attitude of entitlement, exemplified well by Cho Hyun-Ah, the daughter of the CEO of Korean Air who, “famously flew into a rage when macadamia nuts were served to her in a bag and not on a plate on a Seoul-bound flight from New York in December 2014.” When family members wield their privilege this way, the impact on the company is destructive. Even more subtle signs of entitlement, such as showing up late to work or taking lengthy vacations to exotic locations, will undermine the corporate culture.

In light of these dangers, the temptation can be to remove the role of inheritance from the company altogether and make family members earn not only their job, but even their ownership in the company. This merit model can seem appealing, but it also brings real risks with it. Pitting family members against each other in a kind of talent horse race can create sides within an organization, potentially even splitting it up, which is what happened when such a sibling rivalry led the Dassler brothers to separate their company, Sportfarbrik Gebrüder Dassler (Geda for short), into two competing companies, Adidas and Puma.

Forcing family members to earn their ownership may make them feel compelled to work for the company even when it’s not a good fit for them. These “golden handcuffs” can have a negative impact both on that individual and, because of their dissatisfaction with being there, the broader company. And when someone does choose to leave, the company’s resources may need to be diverted away from investing for growth and toward funding the buyout of their shares.

Striking the Right Balance

So, at the extreme, neither the inherit nor merit models are viable. A successful family business needs some of both. There are three main actions you can take to find the right balance.

1. Differentiate between compensation and dividends.

2. Clarify the decisions that come from management from those that accompany ownership.

3. Create a family culture that recognizes the importance of both active involvement and passive shareholding.

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Originally published on HBR.org, 12 September 2022.