While benchmarking information is available on what oil and propane companies typically pay their drivers, dispatchers, salespeople and other employees, the data is less forthcoming when it comes to how much the owner should be paid. One person who has given the topic a great deal of thought is Marty Kirshner, a CPA in the Energy Practice Group at the accounting firm of Gray, Gray & Gray (Canton, MA). We asked his advice on how to determine the “right” compensation for a company owner.
Oil & Energy: Is there a “best practice” method for determining owner compensation?
Marty Kirshner: There is no “magic formula” or percentage that applies across the board. Typically, we do a calculation of the owner’s compensation and benefits (including such items as health insurance and 401k) on a cost per gallon basis. I will ask the owner: How much do you want to make? Once they answer that question, we figure out what their fixed overhead costs are, then run the numbers to determine how many gallons they will need to sell, and at what margin, for this to happen.
OE: Do some owners simply wait to see what the company profits will be and take some of it—or all of it—as their compensation?
MK: Most owners take a salary or guaranteed payment (depending on the entity structure) during the year. Then they distribute profits out of equity at the end of the year, depending on how the year went and how much is in their equity and cash accounts.
OE: Is there an average compensation for owners across the industry?
MK: Hardly! Owner compensation is as varied as the thousands of companies in the energy business. While you might expect that the owner of a larger company would receive a higher level of compensation, that is not always the case. And there are some small companies that are very profitable—enough so that the owner is very generously compensated.
OE: How can you tell if you are paying yourself too little? Too much?
MK: What I have seen with many owners is that they get used to a certain lifestyle, especially if they have been successful for a period of time. They don’t want to step back once they have achieved that lifestyle, regardless of how the company is doing. In a down year they may draw too much capital out of the company. But in bad years the owner should not be paying themselves as much money as they do in a year when profits are higher.
If your company is sitting on a pile of cash (not customer prepayments) and you are taking a modest salary, not taking any distributions, and not reinvesting the profits into the company, then you probably aren’t paying yourself enough!
OE: Any other insights on owner compensation?
MK: It is important to note that some owners still go out and make deliveries and service calls, while other owners prefer to stay back in the office and keep the company running. A few owners are even at the point where they spend the winter in their Florida house while somebody else operates the company. Typically those owners are the ones that have already worked hard and paid their dues to the company.
Managing your fixed costs is the key to optimizing what you can take home. To maximize how much money an owner can take out in compensation it always helps if they are generating revenue in some capacity. That doesn’t necessarily mean going out and making deliveries and service calls. Perhaps the owner is good at developing new business or making other strategic decisions that help optimize the profitability of the company. If an owner is doing none of the above, however, they are likely to be a fixed cost with no revenue to offset it.
Most owners understand that they are supposed to be the last ones to get paid. They must take care of their employees first, otherwise there will be no one to do the work. Whatever is left over is what they can take as compensation. Effectively managing your fixed costs is a key to optimizing what the owner can take home.
Martin Kirshner, CPA is an Accounting Manager with Gray, Gray & Gray, LLP in Canton, MA. You can reach him at (781) 407-0300 or firstname.lastname@example.org.