ha A"justify Greg: So what’s the compensation structure?

All the buddies: We’re all going to make the

same salary. Greg: Really? I have news for you: fair does not mean equal. I’ve rarely seen two people
worth exactly the same amount of money. I’ve never seen three people worth the same amount of
money. A lot of people find themselves in this situation, and they ask me how to fix it. I tell them they
need to have an honest and frank discussion. A lot of times, I mediate these situations, or if there’s
somebody else in the business who is respected by all the parties, that person will mediate. The people
who have this discussion in the early stages of business formation are the ones who succeed. The CEO
should usually be the highest paid salaried employee in the business. There are only two positions that
might get a higher salary than the CEO. One is a salesperson who’s on an eat-what-you-kill incentive
program. The other is an expert technical person who gets a high salary at the early stage of the
business when you have to build the whole business off of that person’s technical skill set. You might
give the technical expert some ownership just for the sake of it, but you’re really leveraging that
person’s technical ability with your ability to be an entrepreneur. When you have just one technical
person who is an expert (and not the CEO) the business is not vibrant enough to pay the CEO more than
the expert. Once you have multiple experts on staff and support people, the CEO has a much larger
enterprise and can justify the largest salary. There is another major problem with three friends setting
up a business and proposing to be paid an equal salary. No one is the leader. Management by
committee is an absolute failure as a business model. There has to be a clear leader even if the stock
ownership is equal. If no one is seen as the clear leader and director of the business, it will stagnate very
quickly because you won’t have a focused leader saying, “Here’s the way forward. You guys follow me!”
You may want to answer salary and leadership questions over a period of time, but you need to make
these tough decisions within a couple of years. The success of your business depends on it. Sometimes
multiple shareholders have different needs when it comes to salaries. Here’s another common scenario:
Entrepreneur: I have a partner and only one of us is taking home a salary because my partner can afford
not to. What do we do about straightening out this problem? Greg: When you’re in a situation where
you’ve got two shareholders and there’s not enough profit for everybody to make a market-based wage,
you need to account for it as debt as the unpaid salary builds up or as an accrued salary that wasn’t paid.
If you don’t use either of these approaches, there has to be a shift in equity ownership. I like the sweat
equity solution. Maybe you do it in two phases. You start out with a debt up to a predetermined point,
and when the debt reaches that point, you make some equity changes. I’ve done this in my own
business when some of the partners couldn’t go without cgna A withoutompensation. We adjusted the
equity based on who could go without a wage and who couldn’t. GOT INVESTORS? QUANTIFY
EVERYTHING Sometimes having an outside investor makes owners think twice about paying themselves
a market-based salary: Entrepreneur: I have a multi shareholder company in which I’m the employee
shareholder and I have an outside investor. The investor isn’t being paid, of course, since he’s only an
investor. But how do I get the investor to understand that I need to be paid fairly for what I do? Greg:
One of the best examples is when you have what I call a money partner (the owner who provides
investment capital to the business) and an effort partner (the owner who works in the business but does
not have money to invest in the business). If I’m starting a business with you and I have the ability to do
something but I have no cash, I need a funder to put money in. This philosophy says that 100 percent of
the profits and losses of the business should be allocated to the money partner until that partner
recoups the initial investment. After that, you move to some agreed profit and-loss percentage. Let’s say
I’m worth $100,000, but I’m going to take only a $30,000 salary. This way, I pay back my money partners
$70,000 a year sooner than if I had taken my full salary. This is a phenomenally effective way for you to
create capital in the business. The key, though, is to never let yourself be trapped into thinking that
you’re worth only $30,000 a year. Make sure that you will be able to move your salary to a market-
based wage at some point. You must discuss the wage issue with the money partner up front. Decide
what the market-based wage is from the very start so you’re in agreement when the time comes to
increase your salary. If you can’t go without a market-based wage, it means that your standard of living
requires you to be paid your full salary from the beginning. In this case, you’re going to slow the process
of the investor getting back the return on his or her investment. I’m not a fan of sharing profits before
the investors are paid back. There’s always going to be some animosity. The investor will think: Hey, I
put all the money in, and you’re getting your salary and a share of the profits. Look at how long it will
take for me to get my money back. One of the skill sets that we’ve built into our firm is the ability to
forecast and quantify every situation. We believe that you have to play out multiple scenarios—actually
plan out those cash flows—and create reasonable expectations for the investor. Will it take eighteen
months for the investors to get their money back? Or will it take five years? And is there a scenario in
which an investor never gets the money? If that last question is a possibility, the deal shouldn’t have
been done! Quantify everything, and put it in writing. TRANSITIONING OUT OF YOUR BUSINESS Here’s
another way in which giving yourself a market-based wage helps you. Let’s say you’re the founder of a
business, a single shareholder, and you’re ready to sellt-b Ady to se the business or transition out of it. If
you’re not paying yourself a market-based wage, you really don’t know what it means from a financial
standpoint to bring in another general manager. You’ll have to pay your replacement a market-based
wage, and this will negatively impact your business’s net income. But if you’re already paying yourself a
market-based wage, it’s easier to step out of the role of being an active manager and into the role of
being only a shareholder. You can hire your replacement with no negative impact on your net income.
Not only that, you have a methodology in place that reflects the true profitability of your business.
Instead of retiring, you might consider a part-time role that pays less than your CEO salary, such as being
a finance person or a customer advocate. I recommend easing out slowly, because stepping out of a
business abruptly usually creates a vacuum. This approach allows you to effectively transition out of the
business in phases. You’ll also know if your business will produce, for example, $500,000 a year of pretax
profit no matter who’s running it. And if you give your replacement a market-based wage while you stay
on in a lesser role, then you can hold that new person accountable. You can even set up an incentive
program to motivate the new CEO. Tell the new person, “I’ll share a percentage of anything you get
above my baseline profit number. Your baseline could be what the business was doing before you hired
on as the new CEO or it could even be a higher target. But if you don’t get what I was getting when I was
CEO, you’d better give me a good reason. Is the market causing lower revenue and profitability, or is it
because you can’t make it happen?” This naturally leads to a question