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!
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