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The delicate subject of business owners’ salaries

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When business partners launch a new company, all of their attention and energy goes into getting the new venture on its feet. However, it’s not long before questions and difficulties arise over disparate workloads, responsibilities and remuneration. Darren Bourke offers some advice on how to keep all parties walking in the same direction.

Most businesses start out with a very simple model where all owners earn the same amount. This is very egalitarian and is a no-brainer at the start. The business probably earns little money, all the owners work in the business and operational roles are generally blurred. Everybody does a bit of everything and typically work similar hours. Sound familiar?

This period is characterised by energy, passion and hard work. Despite the hard work, it tends to be fun and exciting, with the owners gladly cooperating as the “baby” is born. The owners unite as they believe there is life in the business.

Growing pains

As the “baby” matures, however, the next stage of the business’ journey requires a more sophisticated approach, involving strategy, systems, processes and people. Roles change, relationships change and new strategies need to be developed and implemented.

The desire to succeed requires owners to take on differing roles, with some taking on more responsibility than others. The stakes get higher and pressure rises. Through this maturity, relationships change from “friends” to “business partners”. That’s not to say owners can’t be both, but the working relationship tends to shift to more of a “business partner” relationship. This has to happen in order for objectivity and healthy debate to flourish.

It is at this point that businesses must attempt to separate operations from ownership.

Operations versus Ownership

They both start with an “O”, but that’s where it should end.

Where a business has multiple owners there will come a time when operational roles must be clearly defined.

The role each owner plays in operations should be clearly defined to the ownership group. Assuming the business is profitable and you wish to adopt a commercial focus, owners should be remunerated for their contribution to operations at market salary levels.

The role each owner plays from an ownership perspective would typically include their position as Director and Shareholder (Investor).

Define operational roles

The best way I’ve found to define operational roles is to take away the name of the person filling the operational role and replace it with an operational title. For example, if owner John runs the overall operations, we might call him General Manager.

Now we have the title of General Manager, we can write a Position Description for the role of General Manager and include all the responsibilities and duties contained within the role.

The exercise of doing this for each owner’s operational role is pivotal in our path to assessing owners’ remuneration.

How to set owners’ remuneration

With our operational position descriptions now drafted, we must set owners’ remuneration levels. I recommend you use a Total Remuneration Package approach that includes base salary, superannuation and benefits. This provides a total figure that each owner can then decide how the components are broken up.

There are broadly two ways to set the remuneration packages.

Firstly, the owners could look at similar operational roles within their industry or of businesses similar in size. Industry knowledge, business associates and advertised positions help here. This approach requires a lot of goodwill and introduces conflicts of interest with owners’ determining their own remuneration. Arguments and ill feeling may follow when some owners earn more than others.

Secondly, the business could engage an external independent remuneration consultant to assess their operational roles. An external consultant may have specific industry experience or overall experience in assessing remuneration levels. They generally have access to benchmark market data and provide detailed reports, including suggested total remuneration packages. This approach is superior to the first because it is independent, external, expert opinion without a conflict of interest. It works equally well when there are some owners working operationally in the business and others are not.

Other considerations

While owners should certainly not be remunerated by mere virtue of being a shareholder in the business, some owners should be remunerated for their contribution as a Director.

Where one owner fulfils the role of Managing Director, and that role requires a contribution of time and expertise beyond their operational role, it may be appropriate to pay Directors Fees to that individual. Further, if an owner has no operational role but fulfils a Directorship that requires time and expertise (beyond a passive Directorship), then payment of a Directors Fee may also be appropriate.

Where a business has a Board (officially or not) on which some owners fulfil positions and others do not, a separate Directors Fee may be payable in addition to their remuneration package paid for operational contribution.

Darren Bourke is a consultant, business coach and mentor who helps small and medium businesses struggling to maximise profitability, productivity, people and performance. His Free Report titled What Successful Owners of Growth Businesses Do That You Don’t, newsletter and updates are full of strategies and tips to make your business boom. Sign up now at www.businessinfluence.com.au

Photo: Net Efekt

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