Most family ranches are subsidized with free, or underpaid, family labor. Sometimes the difference between what family members get and what it would cost to hire someone else to do the work they do is made up with the promise or expectation of sweat equity. But sweat is not a recognized form of currency and people counting on sweat equity usually have a grossly exaggerated idea of what their sweat is worth. This often leads to serious disagreement and disappointment.
If you are going to count on sweat equity and want to avoid the inevitable misunderstandings that happen when it comes time to cash in on your sweat, then you’d better start actually counting it. How many hours? For how many years? At what rate of pay? With what interest on the unpaid balance?
I mentioned the perils of relying on sweat equity in a workshop recently. I suggested we stop using the term sweat equity and call it what it really is, “deferred wages.” My comments apparently struck a nerve with one 30-something rancher. He approached me after the program and asked if I could help him calculate what his sweat was actually worth. He said that he’d come back to the family ranch after college 10 years earlier. He’d been drawing a low wage and banking on sweat equity. As is usually the case in family ranches, there was no formal agreement documenting exactly what his sweat was worth.
He was being paid $25,000 a year, but his compensation package included a nice home, a vehicle and insurance for his family. All-in-all a compensation package worth well over $50,000. “Maybe I’m not as underpaid a I thought I was,” he said.
I suspect that he was probably being underpaid somewhere between $10,000 to $20,000 a year. I showed him that for every $10,000 he’d been underpaid, he earned 0.1% equity in his family’s $10,000,000 ranch.
($10,000 ÷ $10,000,000) x 100 = 0.1%
I showed him that over the previous 10 years, compounding interest at a rate of 3.5%, he’d earned a whopping 1.2% equity stake in the ranch. Like a lot of young ranchers returning home, he hadn’t ever thought about how much his sweat was worth but had assumed that it would add up to a lot more than that.
Sometimes sweat equity isn’t just about compensating someone for the work they do. It’s about acknowledging the sacrifices someone may have made, foregoing other opportunities to come back to the ranch to support the family. If there are several kids in your family, but only one has invested time and energy working on the place and has shown a desire to continue the business, it may be fair to give them an equity position. After-all, as succession planning advisor Don Jonovic points out, fair doesn’t necessarily mean equal.
But whether sweat equity is a substitute for a paycheck or acknowledging a sacrifice, we need to be clear about what we are compensating and its value. We need to convert assumptions and expectations into agreements. We need to figure out what our labor is worth (the topic of the last ProfitTips column). We need to document the value of our sweat while we are still sweating.
For more on documenting the value of sweat equity watch the video below:
Dave, you have covered one of the most essential issues that any family business must address before a family member finally decides on coming back to join the business. Much heartache and hard feelings can be avoided by gaining consensus on this matter up front. Getting a third party consultant like yourself to facilitate such a process would also be essential as emotions can run high in such settings. And as you quoted, fair does not necessarily mean equal, especially when there are other siblings involved who may be heirs, and not “sweaters”.
At the risk of sounding mean, I think you’ve been a bit soft on the young man you were counseling in the video example. The value of his housing allowance (a beautiful, modern, 4-bedroom house plus free utilities and free groceries for his family) would be valued at $20K per year, at least in my neighborhood. This adds another $10K per year onto the calculated package. So, over the past 15 years, that’s an additional $150K. Plus, based on the age of his parents, he’ll likely continue to receive that “extra” $10K for another 15 years, until inheritance happens. By then, his extra will have soared to $300,000.
What this young man really needs to do is step up and begin acting like a manager, if only to justify the package he is already receiving. And if his management could significantly increase the value of the ranch or the business, then more compensation could be considered.
One helpful alternative might be for him to look at the compensation package he might find for doing similar work at some other ranch. That would also define his “lost opportunity”.
another great article and video – reblogged.