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Aprincipalscompensationhasfourelementssalaryprotperksandequity.CreativeBusinessBonusesprotsharing.Distribution.Boss-to-employeesalaryratio.Prot.RAISINGTHENUMBERSNON-SALARYDETERMINERSdistributedexceedingprotgoalsby10means10000.Theformulacanbekeptprivateuntilthetotalbonusgureisannounced.Protdistributiontoprincipalsisaccordingtotheirownershipshareandtypicallyatyearend.ForUnitedStatesLLCsandScorporationssuchdistributionsaretreatedassalary.ForCcor-porationstheyaretaxedatboththecorporateandpersonallev-elsasdividends.Hereisthewayaprotdistri-butionmightlookforave-per-son700000AGILLCwithaprincipalwhodraws115000insalary.Atyearendthereisan8protof56000.Thisissplitroughlythreeways1850033isdistributedtothefouremployeesasabonus4625each1500026isinvestedinnewequipmentand2250041isayear-enddistributiontotheprincipalraisingherorhisannualpayto137500.Somermshavedifcultypay-ingmarket-ratesalariestoprinci-pals.Evenmorehavedifcultydoingitandstillturningaprot.Thecausesaremuchtorm-specicandcomplextoaddresshereindetail.Buttherootoftheproblemsusuallyliesinoneormoreoffourareas.armbymakingstrategieslessdependentofprincipalsidiosyn-crasies.Anditisnecessarytoprovidearationalbasisforemployeebonusesandprotsharing.Forallthesereasonsrmsshouldproduceaprotnotjustpayexpensesandprovideevery-onewithgoodsalaries.Assumingprincipalsdrawrea-sonablemarket-ratesalariesahealthycreativebusinessshouldhaveagoalofearning15ofAGI.Obviouslymoreisprefer-ablebuthighermarginsinser-vicebusinessesareunusual.Inarecentyeartheaverageoftheworldssixlargestpublicly-tradedadvertisingagencieswas11.Theyhavealongtraditioninthecreativeservicesindustryforgoodreasontheycanbothmotivateemployeesandrewardthemforextraefforts.Thissaidprincipalsoftendeprivethem-selvesofsuitablecompensationfortheirownershipinvestmentandrisksbysettingtheemploy-eethresholdtoolow.recommendsthatthethresholdforemployeebonusorprotsharingbeaprotofatleast5ofAGI.Thatisthatprincipalsreserveanyprotbelowthisamountforthemselves.Generositybeyondcanbediscretionary.Employeebonusesandprotsharingaremoremotivatingandrewardingwhengoalshavebeenannouncedandprogresstrackedagainstthem.Alsowhenpaidquarterlyorsemi-annually.Thegoaldoesnothavetobemadepubliconlythedegreetowhichitwasexceededorfellshort.Forexamplemeetingprotgoalsmeans5000willbe75000to115000100000to135000forve-persons125000to165000foreight-personsand150000to200000fortwelvepersons.Againtheserangesarebasedonmarketfactorsanddonotincludeanynon-salarycompen-sationforinvestmentinthebusi-nessoritsownership.Anotherwayofdetermin-ingprincipalssalariesisinrela-tiontohowmucharmsemployeesmake.Giventhelargevarietyofrmshigh-to-lowratiosorapercentageofpayrolldontworkwellforthispurpose.Butrelatingprincipalssalariestoarmshighestpaidemployeesdoes.Formostaprincipalthebossshouldbereceivingasalary10to15greater.Whenthisboss-to-highest-paid-employeeratioisoutoflineitusuallymeansthatprinci-palsarebeingpaidtoolittletopemployeestoomuchorviceversa.Onepossibleexceptioniswhenthereisahighly-talentedstaremployee.Thisshouldnotbeaconcernthoughassumingprincipalsmorethanmakeupthedifferencelaterinnon-salarycompensation.Unlessthereisanunusualandtemporarysituationaprincipalstotalcompensationshouldalwaysbesignicantlyhigherthanthatofthehighestpaidemployee.OtherwisewhytakeontherisksofownershipWhenprincipalsarepaidregularsalariessuitabletotheirresponsi-bilitiesitispossibletogetagoodfeelforhowwellthermisalsodoing.Itistheuniversalmeasureofbusinessperfor-mance.Itcanbeacrucialfactorinnegotiatingalineofcreditgettingaloanorsellingabusi-ness.Internallyitindicateshowmuchleewayarmhasinhiringorpromotingstaff.Itprovidesfundingfornewequipmentorfacilities.Ithelpsinstitutionalize3CreativeBusinessMarchApril2008PrincipalsofU.S.firmsstructuredasCcorporationsmightwishtoreduceprotsfortaxreasons.Nonethelessshowingsomeprotisusuallyadvisable.AGIisAgencyGrossIncomeorarmsincomethatexcludespassthroughssuchaswhatisreceivedthenpaidoutforclientprintingormedia.AGIiscomposedprimarilyoffeeandmarkupincome.