One of the major problems with the family compensation system is that once the senior family member passes on, there is no one to lay down the law with regard to what the compensation should be. As a result, family members begin in-fighting, and the stronger contributors resent any equal sharing of compensation with their family members. One of the beauties of the market value compensation system is that when it is done right, including careful, routine and regularly-scheduled evaluations, it is not dependent on a strong senior family member for its efficacy. Because it provides for lesser compensation for those contributing less to the business, it will often result in the weaker family members leaving the business, which creates a lesser strain on the business in tough times. Effect of the Market Value System on True Profitability Family businesses are notorious for masking profitability.
Masks can be either positive or negative.
When one looks at the profits of the family business, they are often exaggerated since the amount by which the rent falls below market value is essentially added to the profits of the business venture. When one considers that the real estate could be rented at market value to others, this results in an inflated picture of the profitability of the company. Much the same occurs with compensation. And again, this can be either positive or negative. This would give an inflated picture of the company's profitability.