How Much is Too Much?

Feb 04, 2002

John Dilbertson left the Dilbertson & Terry board meeting shaking his head. How many times did they have to reconsider the issue of principal compensation, particularly base pay? It seemed like it never ended. One principal thought another one made too much. All the principals thought the managing principal made too much. Someone thought his or her own salary was too low. The ownership transition plan was stalling due to the staff’s inability to afford the stock. The employees were complaining because the cash-basis bonus plan didn’t have anything in it and they thought what the principals paid themselves was to blame. Every other board meeting had “principal compensation” on the agenda! How much should the top people in any firm pay themselves in terms of salary? My experience tells me that this issue is a constant source of discussion (and anguish) for people in this business. Here are a few of my thoughts on this topic (in no particular order of importance): Base pay related to billing rates. With very few exceptions, it should be no higher or no lower than the billing rate the principal can command. For example, if the firm has a targeted billing multiplier of 3.0, and a principal is able to bill his or her time at $175 per hour, that implies a base pay rate of $58.33 per hour, or roughly $121K per year. This is a range, however, as it could easily vary between 2.7 and 3.3 times raw labor and, depending on the multipliers of the other staff in the firm, result in an overall 3.0 effective multiplier. But it’s a good place to start. Base pay variation for different types of top managers. Exceptions to this rule usually revolve around people who don’t typically bill their time (marketing directors, CFOs, etc.) and those with the top job (president/CEO, etc.). The staff people are difficult to deal with because they are one of one in their firms and critical to the overall company’s success, yet part of that dirty word we call “overhead.” Look to salary surveys (our own and others). But most important, follow your gut and pay what you think you need to pay to keep someone who is mission critical (if they are) under your employ. Presidents, CEOs, and managing partners are other difficult positions to deal with base salary-wise, as there is typically a 20% to 50% differential between the people in these kinds of jobs and the rest of the principals, and this is often a tough sell in a culture where everyone is thought to be pretty much equal (a very typical situation). And last, there is usually some expectation of differentiation in pay for principals who are operations managers or those who run branch offices or significant divisions for the firm. I would typically peg the differential for these people at 5% to 20% above and beyond the other principals. Base pay related to stock obligations. Adding to the complexity of this base pay issue is that of stock purchase loan payments. There may need to be some factor of inflating salaries to make it possible for your people to buy stock on the installment plan. How much inflation is a very subjective thing. I would have a hard time supporting any more than 5% to 10% above and beyond what someone’s “street value” is because of the impact that increase has on costs and the ability of firms in this business to make a profit (it’s already hard enough without deliberately overpaying people). A lot of firms want to deal with stock payments strictly from bonuses. I am 100% opposed to this practice for many reasons. First and foremost, what happens if the firm isn’t profitable and doesn’t pay bonuses? Usually, the entire ownership plan is jeopardized! That’s why we much prefer chipping away at the obligation through payroll deduction from regular salary payments. It’s more consistent and a lot less likely to result in the firm’s ownership transition plan being put on hold. Originally published 2/4/2002.

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