Problem Submitted By L.E., South Dakota

My husband, Tim, 48, manages a large farm here that he owns with his father. They have put estate and compensation plans in place, which are working just as they planned.

They farm together with another larger farm corporation that is owned by my husband's Uncle Emil's family.

The two families each own their own land and share ownership of equipment. They also share grain and produce storage, office space, shop space, and employees through various arrangements between these entities.

At year's end, we calculate expenses based upon the proportion of irrigated acres each farm planted that year. Equipment is owned and depreciated in a similar way. For the past 32 years, this arrangement worked well.

Uncle Emil recently passed away. His family wishes to continue their farm operation and wants Tim to oversee the operation for them, as Emil wanted.

Emil's wife, Betty, does the accounting for her family's corporation and wants to maintain that role. I do the accounting and production records for our corporation (and research for issues such as this). I do production records for both.

We are working on developing a compensation plan for my husband to manage Emil's family's farm, and we would like it to be, at least to some degree, performance based. Emil had wanted it that way and said so before he died.

We developed incentive compensation plans for a hog operation in the past, but we weren't happy with the results.

This problem needs some expert advice. Please help!

Dr. Jonovic's Solution

The arrangement these families originally worked out was wisely designed, but that design assumed the families shared management input. Now, expecting Tim to lead both operations, they need to adjust both his pay AND their decision structure.

They essentially have a holding company, though that's not the legal structure. Looked at this way, Tim will be operations manager of two subsidiary farms and, therefore, his performance bonus should be tied to the combined operating profits of both.

His base pay should be raised somewhat to recognize his broader responsibilities, but the significant increase could come from an incentive or bonus. This could be determined by setting aside, say, 10% of annual combined operating profit as potential bonus, with the actual bonus being paid to him in proportion to his achieving certain goals or objectives. Profit can be defined here as a rolling average of three years to account for the volatility inherent in agriculture.

With Tim's bonus paid, the families would share net profit proportional to assets, as before.

It's important to note that while the operations people of both farms will report to Tim, there is no real boss in their structure. Betty is owner/representative of the larger farm, so Tim most likely can't make all the decisions alone. To avoid conflict, they'd be wise to form an executive committee or a joint board of directors to which Tim would report. Betty could serve as chair. They should decide what types of major decisions require a group vote.