Compensation vs Revenue

Hello there. How are you guys doing?

I have a little question that has been bothering me for some time. Do CEO and other head position salaries correlate to the company's revenue all the time or are there exceptions to this?

I have seen, especially in cases of some niche construction companies, that the CEO's compensation can be in the seven figures, even though the company's revenue is only 10 - 15 million dollars. How can this be?

Do CEOs of private companies have more jurisdiction in how much they can be compensated if the overhead is very low as opposed to public companies? What are the limits? Please enlighten me as I am in the dark.

Thanks.

Sincerely,

Steve

 

A private company of 10-15mm turnover is unlikely to hire a third-party executive to run the business. In many instances the shareholders/founders hold the key managerial positions, in effect giving themselves absolute power to set the salary at whatever they want (not that they would do so)... of course there are exceptions but I'm sure paying some guy 7 figures for a 10mm company is highly unusual and really doesn't make any sense

 

While I agree with the above comments, there are a few circumstances that I think may explain large compensation as a percentage of revenue:

1) Are you sure that all the pay is curerntly taxable and not non-qualified deferred compensation? More generally, if you are looking at a P&L statement, it may not break down what is actually being paid in cash versus what are accrued expenses for incentive compensation.

2) I have seen (quite frequently actually) a situation where the company in question is a "S" corporation 100% owned by an ESOP (a qualified retirement plan) whereby all income of the company is not currently taxable. To make up for the lack of financial incentive of ownership, top management receives huge compensation compared to similarily sized competitors, only part of which is usually actually cash (see #1 above).

3) If the company is essentially a professional service firm (low overhead, cap ex) that necessitates very high end talent to operate, this situation does not seem that far out of line. For example, I know of several professional associations (think heart/brain surgeons) that join together all specialists in a particular field over a set geographic area together and consult with every hospital in that area. Average compensation in that group is around ~$2-3MM on revenues of ~$30MM. The reason they do this is that they don't want to leave any cash in the operating entity for fear of malpractice lawsuits that may subject the entity to liability (and by extension, doctors unassociated with the alleged wrongdoing of a partner). They take this approach versus ownership distributions (partnerships or LLCs) because unpaid wages make the receipient an unsecured creditor, the same as a tort claim creditor, and above the interests of ownership.

All this makes sense on some level, but if we were to lose the cap on the social security tax, all of this would change overnight.

 
Best Response

Generally for an established bank the compensation payout to the bankers is between 50%-70%:

A few examples: Moelis (2016 FY): $613M revenue, $360M compensation expense (58%) Evercore (2016 FY): $1,364M revenue, $900M compensation expense (66%) Houlihan Lokey (2017 FY): $872M revenue, $582M compensation expense (67%)

*Note only Moelis is a pure IBD advisory firm (Evercore has AM and HL does FDD work too)

 

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