Attracting and Keeping Non-Family Executives

A family business can name one CEO. It can't staff a finance function, a sales organization, an operations team and a technology group with relatives. Somewhere on the way from a few dozen employees to a few hundred, the people who actually run most of the company stop sharing the owners' surname.

That makes the non-family senior bench one of the most important and least discussed parts of a family firm. The CEO question gets the attention, and it has its own article on bringing in a non-family CEO. This article covers everyone else at the top: the CFO, the COO, the heads of sales, product, HR and technology. It explains why family firms hire outside executives, the barriers that make them hard to attract and easy to lose, what the research says, how to design pay when equity isn't on the table, and which governance supports make the whole arrangement credible.

It sits inside the wider topic of professionalizing a family business and the section on family business growth strategies.

Why Family Firms Hire Outside Executives

Families rarely hire senior outsiders because they like the idea. They hire because the company has outgrown the family's supply of skills and hours. The IFC Family Business Governance Handbook describes the pattern directly. In the early years, a driven founder and a few close relatives can run the business informally. As the company grows and its operations get more complex, the handbook says a more formal management structure, decentralized decision making and a qualified management body become necessary.

The same handbook is blunt about what happens when families resist. It says many family businesses ignore the need to professionalize and keep senior positions exclusively for family members. Many of those relatives are skilled managers, but even when they're all good managers, they may not have the specialized skills a bigger, more complex company needs. Successful families, it argues, accept that in the longer term some family members should step down and be replaced by skilled outsiders.

The common triggers are easy to recognize:

• A skill the family doesn't have. Finance, compliance, technology or international expansion calls for experience nobody in the family holds.
• More work than relatives can carry. The company needs more senior leaders than the family bench can supply.
• A need for a neutral voice. An outsider can say no to a cousin without it becoming a family quarrel.
• Succession depth. The IFC steps for building the management team include developing internal training so skilled employees can prepare for senior assignments. A family that wants a real choice of future CEOs needs a strong non-family bench to draw from.

The dependence is also measurable. Chua, Chrisman and Sharma surveyed top executives in 272 Canadian family firms for a 2003 paper in Family Business Review. Succession ranked as their number one concern, and concern about relationships with non-family managers came a close second. The authors found that both the extent and the criticality of a firm's dependence on non-family managers were statistically significant determinants of how important those relationships were. Put simply, the more a family firm relies on outsiders, and the more critical they are, the more the relationship matters to the owners.

The Barriers That Make Outsiders Hard to Attract and Keep

If non-family executives are so valuable, why do family firms struggle to hold them? The answer is a set of structural problems, and most of them are about the job, not the person.

The career ceiling

The IFC handbook names the first one. In many family businesses, part or all of the senior management positions are strictly reserved for family members. That can hurt the motivation and performance of non-family managers who know that, however hard they work, they'll never be part of the senior management of the company. The handbook concludes that many family businesses find it very hard to attract and retain talented non-family managers.

This is the glass ceiling in its plainest form. A candidate looking at a family firm asks one question before any other: what's the highest job I can realistically hold here? If the honest answer is "this one, and no further," the best people price that in.

Perceptions of fairness

The second barrier is how fairly the firm seems to treat people. Barnett and Kellermanns, in a 2006 paper in Entrepreneurship Theory and Practice titled "Are We Family and Are We Treated as Family?", argue that family influence shapes non-family employees' justice perceptions mainly through its effect on human resource practices. Their model proposes that low levels of family influence have little effect on the fairness of HR practices, moderate levels have positive effects, and high levels have negative effects on the fairness of both decision processes and outcomes. The paper is a conceptual model, not a test on data, so read it as a well-argued hypothesis about where fairness breaks down, not as a measured result. The family and non-family employees article covers the wider evidence on fairness and trust.

Inferior packages and idiosyncratic demands

The third barrier is the offer itself. Chrisman, Memili and Misra explain in a 2014 Entrepreneurship Theory and Practice paper that family-centered noneconomic goals can reduce the ability of small and medium-sized family firms to attract high-quality non-family managers. They point to inferior total compensation packages, fewer opportunities for advancement, idiosyncratic strategies and higher performance expectations. They also argue that bounded rationality limits non-family managers' ability to meet those expectations once hired. The result they call the "winner's curse": neither the economic nor the noneconomic goals of the family owners are fully achieved.

Family influence on pay design

A fourth problem sits inside the compensation structure. Li, Ryan and Wang, in a working paper on compensation incentives for non-family executives, report that non-family executives receive weaker risk-taking incentives and weaker pay-for-performance incentives when family ownership is high and when family members serve as executives or board directors. It's a working paper, so treat it as preliminary. But it matches what executives describe: the more the family dominates, the less the pay package looks like one at a company where outsiders have a real stake.

Compensation Design Without Equity

Most families won't hand shares to a hired executive, and many shouldn't. Shares carry votes, dividends and a claim on a business the family has spent generations building. Selling that off to a CFO can create more problems than it solves. But the absence of equity doesn't mean the absence of a stake. The usual toolkit has three parts. These are generic design patterns, not a prescription, and a lawyer and tax adviser should shape any actual plan.

Base pay and annual bonus set against the market. The foundation is pay that's competitive for the role, set by the board or a compensation committee, not by whichever family member happens to be closest. The IFC handbook recommends a remuneration system that gives the right incentives to all managers depending on their performance and not their ties to the family.

Long-term incentive plans. These pay out over several years against targets such as profit growth, cash generation or a strategic milestone. They give an executive a reason to stay through the full cycle of a decision.

Phantom stock or share-appreciation rights. These are cash plans that track the value of the company, or of a defined unit, as if the executive held shares, without actually issuing any. The executive shares in the value they help create, and the family keeps its votes and its ownership. Vesting schedules, valuation methods and payout triggers need careful drafting, because a valuation formula the executive doesn't trust defeats the purpose.

There's a research caveat worth knowing. Jörn Block's 2011 principal-agent model in Family Business Review analyzed how non-family managers should be paid in large family firms. It concluded that their contracts should carry low incentive levels tied to short-term performance measures, moderated by the manager's responsiveness to incentives, risk aversion and measurement errors in effort. It also found that family managers' contracts should include relatively greater short-term incentives. That's a theoretical result, not an observation of real contracts, but it lines up with the practical case for long-term measures over annual bonuses for the outsider.

The design principle that sits underneath all of this is simple. Whatever the instruments, the executive should be able to explain, in two sentences, how their pay moves with the company's performance and who decides.

Governance Supports That Make the Offer Credible

Pay alone doesn't answer a candidate's real fear, which is that their authority will vanish the first time a family member disagrees. Governance does that work.

An independent or advisory board. The IFC handbook cites a study of more than 80 family-owned companies run by the third or later generation, which found that an active outside board was the most critical element in their survival and success. For a non-family executive, an outside board is also a place where decisions get made on the merits, and where there's someone besides the family to appeal to. The family business board article covers how to build one. The handbook also notes that most family firms reserve board seats for relatives and a few trusted non-family managers, and that this makes it harder for outside directors to take root.

A written family employment policy. The IFC handbook says a clear and fair employment policy, covering both family and non-family employees, makes it easier to keep the very best people motivated and interested in the company's growth. It says such a policy aligns employees' incentives with performance regardless of family ties. The family employment policy article explains what to put in one. The practical effect is that decisions about relatives follow rules an executive can read, so they aren't negotiated case by case.

Decision rights tied to the role. The IFC lists decentralizing decision-making among its steps, with decision-making powers linked to the roles and responsibilities of managers and not to their ties to the family. A non-family CFO with a clear authority limit is more effective than one who needs a relative's blessing for every approval.

A visible path upward. If the top job is open to the best candidate, say so in the family constitution or the employment policy, and mean it. If it's not, say that too, and compensate for the ceiling elsewhere with meaningful scope, pay and a real seat in strategic decisions.

Support from the board and the family council. Blumentritt, Keyt and Astrachan interviewed 27 family members and non-family CEOs for a 2007 Family Business Review study. They found that successful non-family CEO engagements were characterized by selecting someone with both business and interpersonal competencies, and by the support of both family business boards and councils. The study is about CEOs and based on a small interview sample, but the lesson carries down the bench: the executive's standing depends on the family's institutions backing them. The family council is where that backing is agreed.

A Practical Checklist for the Family

If you want to attract and keep a strong non-family bench, work through these questions before the next senior hire.

1. What's the ceiling? Decide which roles are open to non-family executives, and state it in writing.
2. Who sets pay? Move executive compensation to the board or a committee, with market data behind it.
3. What's the stake? If you won't issue shares, decide whether a long-term plan or phantom stock gives a real share in value created.
4. Who decides what? Write down the executive's authority and the matters that need board approval.
5. How are relatives managed? Put a family employment policy in place so the executive isn't the sole enforcer.
6. Who can they go to? Give the executive a channel to the board that doesn't run through the family member they report around.
7. What happens if it ends? Agree the terms of exit, including notice, any unvested incentive and what the person may do next.

If you're also weighing the future of the top job, the broader succession planning article is a useful companion.

Key Facts: Non-Family Executives

• A survey of 272 Canadian family firms found succession was the top concern of senior executives and relationships with non-family managers a close second (Chua, Chrisman and Sharma, Family Business Review, 2003).
• The IFC says reserving senior roles for family can demotivate non-family managers who know they'll never reach senior management, and that many family businesses find it very hard to attract and retain talented non-family managers (IFC Family Business Governance Handbook).
• Family-centered noneconomic goals can lead to inferior total compensation packages and fewer advancement opportunities for non-family managers, producing a "winner's curse" (Chrisman, Memili and Misra, Entrepreneurship Theory and Practice, 2014).
• Successful non-family CEO engagements in a 27-interview study were marked by business and interpersonal competencies plus support from boards and councils (Blumentritt, Keyt and Astrachan, Family Business Review, 2007).
• A study cited by the IFC found an active outside board was the most critical element in the survival and success of more than 80 third-generation-or-later family companies (IFC Family Business Governance Handbook, same source as above).

Related Reading

• Non-family CEO
• Family and non-family employees
• Family employment policy
• Family business board
• Professionalizing a family business