One of the more important variables in a business appraisal assignment is the selection of what constitutes reasonable compensation for the owner/employee. For many closely held companies, “no single operating expense affects the bottom-line profit as much as the officer’s compensation,” Ron Seigneur, MBA, CPA/ABV, CVA of Lakewood, Colorado’s Seigneur Gustafson LLP explained at the LEI/CLE conference this week. 

Seigneur summarized the most recent and relevant court cases, providing an exhaustive list of factors that the tax and other courts consider most meaningful in determining reasonable compensation. He also listed several data sources for valuation analysts to consider—as well as those (such as salary.com or salarywizard.com) that are “scary.” Among other reasons, these employer-reported sites do not include data from individual site users and represent national averages, with geographic adjustments based on the percentage above/below the national average. 

Yet, surprisingly, Seigneur still sees data from these sites in some valuation reports. In a recent divorce case, the opposing expert used data from salary.com to substantiate relatively low compensation for the husband, a liquor distributor. Still, when Seigneur used the expert’s job description as the basis for posting a blind classified ad in the local paper—along with Seigneur’s proposed compensation figure—he received over a hundred responses. He whittled these down by education and experience, presenting over thirty-five potential respondents and resumes to the court, which accepted his (Seigneur’s) compensation as the more reasonable.

For more tips, techniques, and war stories: Look for the new article “Reasonable Compensation and the Productivity Adjustment: Tips & Techniques for Owner/Employee Compensation Determinations and Adjustments,” by Seigneur and Kevin Yeanoplos in our newly updated 2009 edition of BVR’s Guide to Personal v. Enterprise Goodwill. Also included in the new Guide is “A Reasonable Compensation Case Study,” by Yeanoplos.