How family offices can protect the bottom line when putting family members on payroll

• Keeping it in the family can hurt the bottom line when it comes to family businesses and their private investment firms, according to consultant Joshua Gentine.
• When a family member isn't pulling their weight, their managers are put in the awkward spot of managing their own client.
• Gentine, a third-generation heir to Sargento Foods, told CNBC how wealthy families can set up the next generation for success — and prepare for the worst.

Joshua Gentine grew up playing hide-and-seek in his family's cheese factory in Wisconsin. His late grandfather Leonard in 1953 founded Sargento Foods, the family-owned cheese powerhouse that reported $1.7 billion in net sales last year.

To serve on Sargento's board, Gentine had to jump through several hoops, including earning an MBA and working at an outside business for at least three years. He was surprised to learn that most groups didn't have similar rules when he started advising other entrepreneurial families eight years ago.

“My grandfather and my dad and his brothers wanted to make sure that there was clarity around expectations if we were to come back to the business, both for the family's sake as well as for all of our employees who rely on us to make good decisions,” Gentine told CNBC. “I came to realize that most families haven't had these conversations.”

As the founder of Bench Consulting, he helps family offices — investment firms of the ultra-wealthy — and businesses plan ahead for hiring and managing family members, such as by setting clear job expectations and transparent salary policies.

Leaving these issues unaddressed can lead to problems such as retention issues, according to Gentine.

“It's one of the reasons why family offices have a really high turnover rate,” he said. “You go in, you recruit these amazing executives to help you run your family office. But if they're not empowered to make decisions, and there isn't a culture of equality — in terms of family versus non-family — I wouldn't want to be a part of that, and neither would they.”

When family members underperform, it puts managers in a difficult position, as their employee is also their client, Gentine said. Preparing for the worst-case scenario makes it easier, he said: setting up a development plan that includes objective performance goals, resources in case an employee fails to meet them, and outside experts to advise on difficult decisions. Sargento has a subcommittee of independent directors who recommend whether family members should be promoted or terminated, according to Gentine.

While the topic is uncomfortable, he said, clients are “incredibly receptive” to setting expectations and contingency plans, as it makes these situations less personal.

“It's not mom or dad saying, 'Hey, listen, it's not working. I'm terminating you,'” he said. Instead, clients can say, according to Gentine, “'I'm going to take the board's recommendation and we're going to have to move on.'”

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Setting those standards also helps with being able to take on competition, he said.

“You can't go into any respectable investment firm and not see clear expectations, [key performance indicators], performance improvement plans and all of these structures,” he said.

Ideally, these requirements help family members feel more secure in their roles. Gentine said he has worked with many heirs who have a chip on their shoulder, as their first job out of college was at the family office or company.

“The family member will always feel, whether they admit it or not, that they've been given a job, not earned a job,” he said. “You can tell that they are uncomfortable in their decision-making, or they're very, very confident in their decisions as they are trying to prove that they do have the skills to make those decisions. Either way, it starts to manifest itself in the culture of the family enterprise.”