Professionals working in the independent financial services industry tend to organize their business the same way as other professional service providers. Whether a dentist, lawyer, or wealth advisor, chances are that the firm owner is both a full-time employee and an active manager of the business as well as a shareholder. We are often asked in our consulting work about this dual role; shareholder and employee, and the interplay between them, particularly as it relates to compensation strategies. For example, should employees be rewarded with stock, or the opportunity to buy stock for achieving certain targets? Or, now that I am an owner, shouldn’t I get a raise?
There are no simple answers to these questions, but context should help to understand the thought process required to make informed decisions when these issues inevitably arise.
Salary vs. Profit Share
At a first level, ownership and pay are distinct concepts with unique rules, purposes, benefits and risks. These concepts represent the division between the return an investor receives on the capital put at risk and the reward received by an employee for the work that is performed. This division should be simple, self-evident and unbending, but the reality in a small business is often far different. The smaller the company, the harder it is to maintain a distinction between ownership returns and compensation. In the most basic model, a one owner company, the black and white lines dividing a return on investment and wages for work often disappear completely.