By Danielle Walsh
When you co-own a business, who determines each partner’s salary? What is this based on? Is it fair? How and when does compensation change? Are owners entitled to company cars? (If so, can I get the new Porsche?) What if I need more dividends? Are bonuses paid equally or based on other criteria?
Salaries, bonuses, benefits, dividends… When it comes to conversations about money, many topics are considered taboo and are left unaddressed. In business ownership, this avoidance can lead to long-term tensions. Indeed, if left unattended or undiscussed, these sensitive topics percolate over time and can create lasting resentment amongst business partners/owners.
In my years working as a family business advisor and chartered professional accountant (CPA), I have seen, first-hand, a $100 discrepancy in annual life insurance premiums become a proverbial Mount Everest between two brothers and co-owners of a jewellery store. Every financial discussion somehow came back to this discrepancy. If $100 in insurance premiums can cause such tremendous animosity, imagine what a real or perceived discrepancy in salary, bonus, dividends, or benefits can cause.
Whether an operation is family-owned or otherwise, business partners need to be able to discuss all things related to compensation. There should not be any issue that is off the table. These conversations can become significantly easier and less stressful when owners have endorsed an overall compensation policy. With a formal policy such as this in hand, a question or concern becomes objective as opposed to subjective, which helps emotions remain in check. A compensation policy should outline not only salary, but also bonuses, benefits, and dividends.
Salary and bonuses
Do all business partners receive the same base salary? What if one owner puts in more time than the other? What if one owns a few other companies and only works in the business part-time? How are bonuses distributed?
For co-owned businesses, these are just an example of some of the questions that should be considered from the get-go. Like all emotionally charged discussions, it is best to talk about these things before a decision needs to be made. Without establishing guidelines, conversations can become heated. By having an agreed-upon policy—for instance, all employees, managers, and owners will be paid fair market value (FMV) for their roles and responsibilities—these issues are easily resolved.
Fair market value can be defined as what you would pay a third party to take on certain roles and responsibilities. When in doubt, you can enlist the help of a local human resource or accounting company to help determine what is fair. This provides an independent third-party opinion of FMV.
Having an identified policy and a process to resolve disputes goes a long way. The policy doesn’t have to be based on FMV—some businesses opt, instead, for one whereby all owners working full-time in a managerial capacity get paid the same (including bonuses).
Keep in mind, however, that owners need to agree to the amount as well as any changes to it. This should be carefully considered, as not all partners will have the same financial means (what if, for example, one owner needs more money now to send his or her kids to university, but the others do not?). This can create a level of conflict that will continuously need to be addressed. Either way, having a policy clearly outlining who gets paid what and on what basis, as well as how changes (increases or decreases) will be decided and agreed to by all parties, will help reduce conflict and align expectations.
While salaries and bonuses are a contentious issue, I often find the most significant grievances lie in the benefits (particularly when they are indirect).
Indeed, dangerous precedent can be set if one partner, without knowledge or approval from other owners, takes inventory, borrows funds from the business, uses business assets for personal use, or overspends on travel. Issues such as these can cause a major rift amongst owners, but a clear policy on what benefits owners are entitled to can help a great deal.
In jewellery businesses, one common issue I have observed is situations where owners help themselves to a piece of inventory to gift to a family member. While the item might be a great perk for the recipient, taking inventory can become a burden on the business if all owners decide to partake. I once met with a client who told me one of their employees had spent hours looking for a few pieces of inventory to no avail, thinking they had been stolen. As it turned out, one of the owners had taken them for his wife without telling anyone or even noting it in the store’s records. With good reason, the incident caused a major conflict amongst the owners.
It is in the best interest of a business to enforce a formal policy on how much inventory can be taken by owners each year. Additionally, the cost (if any) should be identified and tracked by the company accountant. Ensuring all benefits are received with transparency helps reduce any potential conflict. Any pieces taken over and above the allotted amount stated in the policy would have to be approved by all owners beforehand.
The same can be said about business-related meals, entertainment, and travel expenses. I once spoke with a small business owner who was upset because his partner was spending exorbitant amounts on treating clients at pricy restaurants and, when travelling for conferences, would only stay at the most expensive hotels. The budget-conscious owner would spend hours each night searching for travel deals and became increasingly frustrated when he saw how much was being spent after he had made every effort to reduce the cost. The travelling partner, however, perceived staying in expensive suites simply as a perk of owning the business. While neither was necessarily wrong in their thinking, these differing expectations and frustrations started to permeate their working relationship and impact other decisions.
To reduce cost conflicts related to these types of expenses, a policy should be in place outlining a maximum per night cost for accommodation, as well as what class of seat should be booked for travel (i.e. for flights longer than four hours, business class will be provided). Additionally, an established annual budget for each owner addressing travel, meals, and entertainment would also help keep these expenses fair and equal. Once an owner has hit the predetermined budget, there would be no more spending unless approved by all partners beforehand.
Company cars present another common issue often seen amongst business owners.
I worked with a family business where two siblings (for the purpose of this article, let’s call them James and Mary) both worked in management. The business policy stated family members in management were entitled to a company car, but the specifics were
Mary, who was economical in her decision-making, opted for a mid-sized car, which, in her mind, met her needs; James, however, preferred sporty cars, and chose a high-end sports vehicle.
Once Mary started to see the cost associated with her brother’s choice (e.g. new accessories, winter tire storage fees, weekly cleaning, maintenance, etc.), she became frustrated. Calculating the difference in cost between her vehicle and James’s, she realized she could use the difference in funds to put her children in private school, travel, plan for retirement, and so on—just because she didn’t feel the need to spend money on a car, that does not mean she wouldn’t want those funds for something else.
Mary’s resentment permeated meetings with her brother. Every time James recommended spending money on the business, she would get upset. She grew to equate his personal money management to his business fiscal management.
The issue in this case was the benefit was intended to be equal (i.e. as a manager, you get a company car), but its application, due to lack of clarity, was not. James’s choice may have been very different had the policy for the car benefit been for a certain amount every year (say, $7000) and anything above had to be paid personally. Once the family business clarified its car allowance policy and stated as such, the resentment created by this issue between the siblings disappeared, as Mary no longer had grounds to second-guess her brother’s business fiscal management decisions. Clearly, clarity is the answer to an effective corporate benefit policy.
Many businesses opt for a benefit block whereby each owner has a set annual amount they can spend on whatever they choose (e.g. company car, increased travel budget, RRSP contributions, inventory use, business assets for personal use, etc.), which is tracked by the accounting department. This method can reduce conflict, as each owner has access to the same dollar amount and can use allotted funds on whatever they deem most appropriate at any given time. Additionally, a benefit block can lessen the need for policies dealing with the different kinds of benefits, as all types fall under the singular block.
Of course, when using this approach, it is important to clearly identify which perks are within the category. If any are not, they should be clearly outlined in a separate policy. If an owner doesn’t use his or her full block amount by the end of the year, the funds can be carried forward or paid out at the owners’ discretion.
Regardless, for every benefit model, clarity is key. Pre-established formal policies should outline which benefits the company can offer, what the benefit entails, how it should be used, and if there is a maximum to consider. This due diligence helps to maintain sound relationships amongst business partners by increasing transparency and reducing the need for difficult or emotional conversations.
Dividends are often considered a contentious issue, as well as one of the major benefits of being a business owner—but who decides how much each partner gets? What if this can’t be agreed upon? What if one person would benefit from more money this year?
When a business is owned and operated by multiple partners, dividends need to be decided on by all partners. This, of course, can create tension, as some owners may be focused on growing the business and re-investing extra funds into operations, while others might need the money for personal reasons. Ultimately, without a dividend philosophy and policy in place, the discussions surrounding what to do with year-end profits can become very stressful.
A dividend policy should be agreed upon by all owners in advance. Is it business-first (i.e. focused on meeting growth and investment plans) or more owner-focused (i.e. pay a portion to each partner, then make business plans around what remains)? Both philosophies are acceptable, but all owners must be on the same page—which isn’t always the case.
Much like salary and benefits, dividends should be discussed early to help align all owners’ expectations. A dividend policy in support of the overall philosophy, outlining a formula or methodology for calculating the annual dividend, goes a long way in removing the subjective nature of dividend payments. Indeed, if all owners can take the business’s financial statements and, using the formula in their dividend policy, calculate their dividend, everyone will have the same expectation. This doesn’t mean an owner won’t require or ask for more funds, but the issue can now be dealt with as a loan from the business, which should be accompanied by clear terms and conditions.
It is apparent the answer to reducing conflict and minimizing difficult conversations related to salary, bonuses, benefits, and dividends is addressing the topic before issues arise and establishing a clear and concise policy, approved of by all owners. This strategy will increase transparency and make discussions surrounding these issues objective as opposed to subjective.
There are more than enough important business decisions owners need to make without the need to quarrel about compensation. Having an agreed upon compensation policy addressing all financial matters among owners will go a long way in safeguarding sound relationships.
Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father recently published a book titled A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via email at email@example.com.