Perhaps this is why they call business valuation an art: Precisely 50% of respondents to our most recent online survey—on the “settled but unsettled” aspects of a DCF analysis—treat excess officer compensation as a normalizing adjustment. Nearly the same number (46%) treats it as a “control” adjustment. “It depends,” says one participant, on whether the interest you are valuing is a controlling or minority. But still another participant points out that the character of the payments is the pivotal issue:
If you have a number of officers receiving substantial excess compensation—which are really substitutes for distributions—then it is a normalizing adjustment. If the excess officer compensation goes beyond owner/officers, then it can be a control adjustment.“I would like to know how one determines whether officer compensation is ‘excess,’” comments another survey-taker. “One could simply compare to industry averages, but if performance is better at firms with higher officer compensation, [then industry data] may be misleading.” The question probably merits more research to determine the true relationship between compensation and performance “before deciding which road to take.”
And yet, “What is ‘normal’ is not necessarily synonymous with a market level of compensation,” says another. “Typically, a control interest could change compensation to a market level or to/from a ‘normal’ level.” Even then, does it really matter what you call the adjustment, “as long as the cash flows, discount rate, and ownership interest are all [adjusted] on the same basis?” Or, as still another participant puts it—perhaps only semi-facetiously: “What’s the difference between a duck?”
One thing is 100% clear. “Surveys like this are very useful for our community,” writes Ty Taylor (Asset Analytics). “Thank you for your efforts.” Likewise, we thank everyone who participated in the survey and will publish more results—and comments—in the coming weeks (and see additional item, below). We also thank Rod Burkert (Burkert Valuation), who helped formulate the questions and will provide a complete overview and analysis for the next (December 2012) Business Valuation Update.