Are you the boss? How much should you pay yourself? How much is enough? How much is too much? Learn the ins and outs of executive compensation during this powerful training.Sign Up to Watch
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-Hey, my name is Caleb Taylor and I just happened to walk into this room while the cameras were going so I'll just let you know what Clay's about to do. He is going to be interviewing Wes Carter, and they're going to be talking about executive compensation. So as an owner, an entrepreneur, how much money should you be paying yourself, and how much money should be going back into the business?
Wes is an expert in drawing up different contracts and answering all legal questions. So he's the man that we need to be listening to. All right, you can probably guess what's up next. You know that here at Thrive15 we believe that knowledge without application is meaningless. So don't sit there and listen to what Wes has to say and not apply to your business and to your life. Because if you do, today's episode could be more meaningless than cranking up the AC and shutting all the vents.
-Wes Carter, thank you for joining me, sir.
-Hey rumor has it, you're not at all related to Sean Carter, hip-hop legend?
-Not that I know of.
-OK, just wanted to make sure, legally speaking, wanted to make sure we're--
-I could be wrong.
-Dotting all the I's here. So Wes, we're talking about one of my favorite topics today which is executive compensation. That's paying people who are executives. Now the actual definition here is the financial payments and non-monetary benefits provided to high level management in exchange for their work on behalf of the organization. The types of employees that are typically pay with executive compensation packages include corporate presidents, chief executive officers, chief financial officers, vice presidents, managing directors, and other senior executives. What does that mean? And just kind of break it down to me. What is executive compensation all about?
-Well, at the base of it, it's about getting paid. Anybody who starts a business, runs a business has to worry about how are they going to get paid. And it's important to think about how you get paid with giving Uncle Sam the least amount possible. So it's important, especially when you're an owner of a business to structure it between your salary and what you're making as an owner through a distribution or through the money coming into ownership of the business itself.
-And just because we know people are tuning in to Thrive in all different countries, potentially other planets, when you say Uncle Sam, I want to clarify, you're talking about paying taxation to the government not so much because you're upset with your Uncle Sam that you don't want to pay very much?
-Correct. The proverbial-- the big government. Anybody who's taking a piece of the pie from you.
-OK. So why is it is so important for the owner of the business to really have a mastery of what they're going to get paid? Because I see a lot of business owners, they pay themselves last, and at the end of the month it seems like they don't have enough-- they have a lot of month left, but not a lot of money left.
-Talk to me about why it's important from the very beginning to get the executive compensation right.
-I think from the very beginning you have to make sure you're not putting in all this effort. Your employees are getting paid. Your vendors are getting paid. But there's no money left over for you at the end. Or that you have some money left over and a big huge chunk of it ends up going to pay taxes.
-How you know what amount of executive compensation is fair? Just as an example, I was working with one lady who's just a wonderful, wonderful lady. Great, great business in terms of customers loved her product. They had lines coming out the door from time to time, very busy on the weekends, and she only paid or so about $19,000 a year. But she had people working for her making more than that. How do you decide what's fair, what's not fair? I mean, just give me some sort of general guideline.
-Yeah, I run into both situations. You have the people I have to convince you're worth more than that. You have to take better care of yourself. And you have the people who you have to convince, you're not worth that much. You need to keep some of that money in the business to help it grow.
-So you're thinking ahead, planing ahead so you can live, put a roof over your head, put food on the table, take care of your family, but at the same time, not just drain all the cash out of the business so it's struggling to keep going.
-One rule that I like to work with clients on, and I tell them is, go ahead and define the kind of lifestyle you want to live in the ideal scenario when the businesses is truly thriving and doing well, and then sort of, let's figure out how the compensation relates to your total gross sales based upon where you want to get to with your financial goals.
-Have you ever worked with a business owner who has totally overpaid themselves and sucked all life out of the business? How do you work through that situation?
-Sure, a lot of times what happens is every cent that comes in over your expenses, the owner ends up taking as salary or taking out of the company. Then as soon as you have an expense and you don't have cash flow coming in, you're the one that has to pay out of your pocket or take a loan out to go pay that immediate expense in the business, or the business is in
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-Let's talk about partners now.
-You have a partner-- let's say, Barry and I are partners. So Barry and I are 50-50 partners. But yet through some weird scenario, I have found myself in charge of doing the accounting for the business. Perhaps a lot of small business owners watching this, you can relate.
-So Barry-- he's working hard, he's making 50%, he's a 50%-50% owner. I own half of it but I'm in charge of the accounting.
-And as luck would have it, I've decided that my work is very valuable. I'm very proud of the work I've done. And I've decided to payment a nice even split of 60-40. I pay myself 60%, 40% goes to him. How do you as an attorney recommended that partners agree on what is fair compensation. If someone's watching this right now, and they have a partner, and they're trying to figure out what's fair compensation, how do you recommend you begin determining what is fair compensation when you have partners involved?
-I think when you have multiple people involved you have to look at two things. One is, how much effort you put in an every day into the business? And then how much should you get from your initial investment? So you have people who are silent partners and they're taking a piece of the profit just because they're the ones that helped get it off the ground and get going. But you also need to compensate those people who are spending 80 hours a week actually putting in the effort. So you have to balance those two considerations so that neither partner feels like they're getting shorted. Because that's an easy way to spell doom for an early business.
-Now I'm going to go over some things that I see business owners that all the time who do not consider this to be compensation. They say no, no, I'm an executive. I get paid but this right here isn't payment. This is just something that the company buys for me, but they're not exactly executive compensation.
-So I'm going to go over these things with you and you tell me if this falls into the executive compensation.
-Yes. If it's not business related.
-If it's not business related.
-What about vehicles?
-Vehicles can be personal, can be business, and if you use it for both you have to account for the personal use.
-If you use it for both.
-So let's say that I drive a Hummer, hypothetically.
-And my business I run-- Make Your Life Epic is my consulting company--
-And it owns my vehicle. But if I used the vehicle half the time for work and half the time for home, I have to account for that?
-If the business pays for the vehicle, than what you have to do is usually you'll portion it somehow between your percentage of personal use versus your business use, and your personal use is actually taxable income to you.
-Hmm. OK. Final question here. What if hypothetically I bought myself an official NBA sized game day basketball for David Robinson to sign. Does that count as executive compensation?
-It would count as taxable income if the business bought it, even though it would be a great investment.
-OK. I'm glad. There's a lot of people who have that concern and I'm glad I'm not one of them, but I just wanted to ask that question.
-So how does the process go about-- let's say that right now, I own a company and I am completely clueless about what I should pay myself. My partners and I are arguing. Walking me through what I need to do to begin. What's step one, step two that I can do right now to start developing a fair executive compensation? What can I do right now?
-Well I think step one is you have to figure out how much money's coming in the door above your expenses. You can't pay yourself if you don't have any money. So you figure out how much you have to work.
-Then you figure out who is putting in the effort on a day to day basis. And you compensate those people based on how much you have, and how much effort are put in, while you still leave enough to spread the love a little bit to the people who own the business.
-And are there any problem areas that you see that you want to talk about that relate to executive compensation? Where you said, these are problem areas, I see it all the time, don't make this mistake. Do you see anything?
-I think one of the most common mistakes is not counting all of your income. You know, you take things like trips, you take things like a car allowance, and you just assume it's a perk of being an owner.
-That this is my baby, this is just what I do. But then you get in big trouble with whoever your local taxing authority is. That small business owners a year or two down the road, they get into trouble for not counting all that as income and it ends up coming back against the business to hurt the business.
-In a real specific example though-- and all joking aside-- for Thrive, we travel a lot.
-And I love to take my wife and I love to take my kids. But my kids are not-- I have five kids-- and so I always like to take one of them with me on the trips. Well my kids are not essential to that trip.
-And my wife is not either. So the way I do it is the company pays for my ticket, but when I take my kids I personally pay for my kids.
-I personally pay for my wife, I personally pay for meals that I buy for the family that aren't related just to me.
-That I am essential on that trip. But I think it's really important you always want to be above reproach as an entrepreneur. You never want to get in a situation where you're in trouble with the IRS. Because they're fun people and I've spent some time with them in audit before. And it's a fun situation. They're fun people, they're great house guests, and they usually don't call before they come over. They just come over.
-Just pop in guests.
-They just pop in. And we just want to help you as the Thrive community to be blessed financially and we want help you to keep out of potentially tough situations. Do you recommend that everybody goes out and finds a local attorney in their state or city right now that could help them through these legal issues? Or should we just go on some legal websites and start downloading templates for these sort of things?
-No, I think the first two professionals you need are going to be an attorney and a CPA. Somebody locally you can talk to or maybe someone in another state that you already have a previous relationship with. But someone who can walk you through the legal aspects and the tax aspects of your compensation.
-Awesome. Wes, I appreciate you being here and putting up with me. And I noticed we have kind of a dual going. I've got these socks that I consider to be sort of fashionable. But then I look at your socks and I noticed that your socks--
-I went with the stripes today.
-Yeah. It's almost offensive, how fashionable they are. But thank you for being here and just wear less fashionable socks next time.
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