When ultra rich hire family members, what to pay them can be tricky

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

Ultra-wealthy families are increasingly using personal investment firms to bring in millennial and Gen Z heirs.

In a tough job market, this is a way for young family members to gain work experience, according to family office consultant Joshua Gentine. Moreover, he said, there are more opportunities for the next generation of heirs to get involved in investing as family offices increase their bets on alternatives and new ventures.

But advisors to family offices told Inside Wealth that pay is a loaded issue even among the wealthiest families.

One of the main problems, according to Gentine, is that family members receive less pay than they would if they were not a member of the family. This trend is especially pronounced for smaller family offices, he said.

“I think families are paid less because there’s this idea that they already receive dividends or have a high net worth, so they don’t ‘need’ a market-based composition. I think that’s completely wrong,” said Gentine, who is also the third-generation heir to Sargento Foods.

When family members feel they aren’t paid enough, it tends to create resentment, but many feel powerless to negotiate or work elsewhere because of their sense of loyalty, he said.

“Does the new generation feel equipped to negotiate and ask for more compensation from mom or dad?” he asked. “It’s a strange dynamic. They may feel that if they do this they will be turned away or appear greedy. They may negotiate at another company – as they should be – but they won’t do that in their family business.”

He said people who are overpaid by the industry standard feel like they are handcuffed and cannot leave even if they want to.

According to Kyler Gilbert of Business Consulting Resources, disagreements over compensation are common, even if they’re not openly voiced.

Gilbert, whose parents founded the company 45 years ago, advises family businesses and family offices. He said that one of his clients had recently made a deal, but his uncles did not give him the promised bonus, thinking the figure was too high. He said the client was reluctant to back out and damage his relationship with his uncles.

Gilbert, 27, said part of the problem is generational expectations. When the family office manager is a self-taught entrepreneur, they often use what their adult children are earning at their age as a reference point rather than the going rate and do not take into account the rising cost of living.

“For many of the current generation of business owners, things have worked in their favor. Markets are up, real estate is up, assets are up,” he said. “That’s great for family offices, it’s great for family businesses, but it means everything is more expensive and compensation is more important.”

Family offices are also less likely to have formalized structures around compensation and job responsibilities. This uncertainty leaves room for problematic practices, such as principals paying the same amount to all members of a generation regardless of their role, Gilbert said.

According to Gilbert, it is easier to prevent these conflicts than to resolve them after the fact. He recommends working with compensation consultants to determine salary levels, or even forming a committee to mediate issues.

Compensation consultant Trish Botoff said conflict is likely to arise between members of the same generation, regardless of whether they earn the same or different salaries. He added that millennials and members of Generation Z are increasingly advocating for themselves.

“The new generation of leaders coming into family offices are not willing to say, ‘Hey, I’ll take your word for it, you’ll shake my hand, and I’ll trust you to do what you say you’re going to do,'” he said. “They want everything in writing. They want compensation plans to be more formalized.”