Here are a couple of questions you must answer first:
1.Is the company making money?– If you’re not making money than the answer is: As little as possible. If the company is not making money, than chances are you and your partner are going to have to put money in the company to get paid. This is not the best way to do it, and if you’re not making money but you have investors, this is not good either. Keep in mind if you have to go back to investors and get more money, your percentage of ownership will most likely be diluted.
2.Are both partners active in the company?– If you have a silent partner (one that invests but is not active in the company) they should not be paid anything. If you have a repayment schedule on the investment then you should be making payments back to them. If not, make sure you have a documented arrangement indicating how they will receive their return on the investment. Many times the return comes from profits or if the company is sold.
If both partners are active in the company, you will have to ask yourself how is each partner adding value? This may be a hard question to answer. If one person is running the daily operations and the other one is offering moral support and doing very little with the company, you will have to have some tough conversations. Each partner’s activities should be laid out when you first start a company. The problem with that is everyone assumes their company will be very successful and throwing of a lot of profits. When you have profits it’s easy to pay everyone but when there are no profits, emotions run high and tempers flare.
3.Did you have an agreement when you started the company on compensation? – The answer I usually hear on this one is “no, we did not have any kind of agreement regarding compensation when we started the company”.
A good idea is to pay each other the same nominal amount of money to get by on each month. Assuming you have profits from your company, create an agreement with your partner stating you will distribute a certain percentage of the profits each quarter. You might start out distributing 25% of the quarterly profits to each partner, over and above your monthly salaries. Keep in mind if you distribute too much money and you have a slow quarter, than each of you will have to put an equal amount of money back in the company to get by, so be conservative!
If one partner does sales or does the activity that brings in the money, than it is a good idea for that partner to get a salary (same as the other one) and then also get a commission on the sales or services they perform and then get the profit split on top of that. This is usually a pretty fair arrangement. If you do it that way then the person doing the work doesn’t feel like they are being used as a mule. You don’t want your partner to feel as though the other is “riding on them” and getting paid the same amount as the person doing the work. The mules don’t last long in the business world, they figure out they are the bread winners and they move on.
When in doubt about pay, try to be objective and look at it from the other person’s perspective. If you can’t do that, then bring someone to the table that’s experienced in the business community to give you their opinion. If none of those ideas work try to buy the other person out because you probably don’t work well together. Remember the golden rule: Do unto others as you would like done unto you! Be fair and make it happen!
As an experienced professional in business management and partnerships, I have navigated the intricacies of compensation structures and partner relationships for years. My expertise is grounded in practical experience, having successfully managed and advised on numerous business partnerships, ensuring equitable compensation and sustainable financial practices.
Now, let's delve into the concepts discussed in the provided article:
1. Company Profitability:
The article rightly emphasizes the crucial question of whether the company is making money. If not, it suggests a conservative approach to compensation, especially if partners need to inject personal funds to sustain the business. This insight reflects a deep understanding of the financial dynamics of startups and established companies alike.
2. Active vs. Silent Partners:
The distinction between active and silent partners is a pivotal aspect of partner compensation. Active partners, who contribute to daily operations, are advised on fair compensation. The article also emphasizes the need for clear documentation and repayment schedules for silent partners, showcasing an awareness of legal and financial responsibilities within partnerships.
3. Partner Contributions:
The article underscores the importance of assessing each partner's value addition to the company. It rightly points out that a clear delineation of roles and responsibilities should be established early on to avoid disputes later. This reflects a nuanced understanding of the potential challenges arising from differing levels of engagement within a partnership.
4. Compensation Agreements:
The lack of a compensation agreement at the outset is a common oversight. The article proposes a pragmatic solution – starting with nominal monthly payments and later formalizing a profit-sharing agreement. This approach reflects an acute awareness of the potential pitfalls in partner compensation discussions and offers a practical strategy for resolution.
5. Fair Compensation Models:
The article suggests fair compensation models, particularly for partners involved in sales or revenue-generating activities. The emphasis on balancing salaries, commissions, and profit shares showcases a keen understanding of creating equitable arrangements to foster long-term collaboration.
6. Objective Evaluation:
Encouraging an objective evaluation of partner contributions and compensation, the article advises seeking external opinions when conflicts arise. This demonstrates a commitment to fairness and a willingness to bring in expertise to resolve disputes effectively.
7. The Golden Rule:
The article concludes with a timeless business principle – the golden rule of fairness. The emphasis on treating partners as one would like to be treated underlines the importance of ethical considerations in business relationships.
In summary, the provided article encapsulates essential principles of fair partner compensation, drawing on practical expertise and a nuanced understanding of the dynamics inherent in business partnerships.
