The Kuroda family controls an integrated orchard operation in North San Diego County.  They primarily manage hundreds of acres of avocado orchards as a Nevada corporation, The Avocado Pit, Inc., a regular corporation for tax purposes, and sell their product to an agricultural cooperative.  Three generations work in the business that also involves distribution and some retail sales.  As more family members join the business, the family is considering entering into a new retail market with a popular, spicy guacamole (wimps need not taste) distributed through specialty grocery stores under the “Hot Guac” label. The following are excerpts from the balance sheet of the corporation for the most recent year:

     Inventory—supplies                                                                                     $ 0.2 million

     Plants (market value = $ 4.35 million)                                                           0.8 million

     Equipment                                                                                                      1.6 million

       Total assets                                                                                                   2.6 million

     Current liabilities                                                                                           0.4 million

     Long-term debt                                                                                               1.8 million

     Gross profit from sales                                                                              $ 3.80 million

     Net income before taxes and owners’ compensation                                   1.45 million

Approximately 400 acres are rented from outsiders.  The other real estate is owned by a limited liability company, owned by the Kurodas, that rents the property to the corporation.  The LLCs only significant assets are shown on the balance sheet as follows:

     Land and Improvements (market value = $8 million;

     cost = $2 million)                                                                                          $1.2 million

History of the Business.  The Avocado Pit has been in the family for several generations.  Control is held by the senior Kurodas, Aptil and Nickolas, who are in their early 70’s.  The day-to-day operations are the responsibility of their children:

• Jennifer Buchmiller, a daughter who earned a bachelors degree in agriculture from Cal Poly, serves as CEO.
• Ralph Kuroda oversees the on-site orchard operations
• Faith Kuroda, Ralph’s wife, has had no specific role in the business, but she takes on various projects and is the motivator behind the guacamole venture.
• Joey Kuroda, the elder son never went to college, but he has worked in the business for 35 years during and since elementary school and really knows the business.
• There are approximately 12 other employees in roles from clerical to semi-skilled to laborer.  All of the employees are fairly compensated, receiving market wages or more for the surrounding geographic area, and employee retention is excellent.  Approximately 50 percent of them are immediate or extended family members who, on the average, receive 15 percent more in compensation than unrelated workers.
• All full-time employees participate in appropriate fringe benefits.  After one year of service they also are covered by a defined contribution retirement that is a matched § 401(k) plan.  The company allows the employee to contribute up to 6% of their compensation, one-half of which is matched by the company, subject to statutory maximums ($19,000; $26,000 for all over age-50).  

The Entrepreneurial Momentum. The entrepreneurial possibility referred to above involves significant risk and great possible financial success.  The recipes have been developed over several years and the company will manufacture its own products in a micro-processing plant.  They have contacts with one boutique retail outlet and hope to expand to greater Southern California within five years.

Requirement No. 1

You are a business and human resource advisor to the family.  What sort of compensation practices do you recommend (including what you imagine they already have)?  Feel free to offer alternatives.

Do you have any specific recommendations regarding compensation, ownership, risk and income sharing for the family?  Be specific—your answers will be evaluated based on adequacy, creativity, and clarity.

Requirement No. 2

Grace Ortiz, is a key employee who the family would like to reward and retain.  How might the company arrange this?  What are the effects to the company and Grace?  Be specific.