"Sometimes the owners are very reluctant to share enough information with the people who might logically participate in a phantom plan," says Wyatt's Edward Redling. "They don't want anyone to know what the numbers are." If they did, he says, they would have gone public a long time ago.
But staying private doesn't mean that they can -- or should -- avoid the question of equity anymore.
"This emotional, it's-mine-and-I-own-all-of-it point of view," says Bratkovich, "can be a real block in recruiting the kind of people they'll want to attract in the future -- most of whom are now very much equity-minded."
Long-term incentives: The stock answer -- no
None 85%
Incentive stock option 9%
Nonqualified 2%
Stock grant 2%
Phantom stock 1%
Other 2%
Note: Total exceeds 100% because of multiple responses.
PUTTING YOURSELF ON THE PAYROLL
When Steven Pruchansky went into the waterbed business in 1978, nobody told him how much he ought to pay himself. He picked a figure out of thin air -- $20,000 a year -- and held himself to incremental raises for the first few years of operation. Only recently after Advantage Distributing Inc.'s sales began to approach $15 million, did he start to take any substantial amount of direct compensation out of the Haverhill, Mass., company. "The company couldn't afford it until then," he shrugs. "And that's the basic compensation criterion, as far as I'm concerned -- what the company can afford."
When you own a controlling interest in a company that is either young or heading into a growth spurt, as Pruchansky and other survey respondents do, you are both employer and employee. You have as much of a corporate interest in keeping your direct compensation low as you do a personal interest in setting it high. In many ways, you are the company -- and what is good for the corporation is good for its ownership. That fact overshadows all other compensation questions.
Philip Nace, CEO of Nachem Inc., explains: "My major goal is to grow the company and increase its profits. My salary is secondary. I figure the more we build into the corporation, the more there'll be for me someday -- whether we liquidate or sell, or whatever."
In such small, closely held companies, executive-compensation planning is a combination of business-strategy and personalinvestment considerations. The decision of how much the CEOowner should take out of the company -- and, to a lesser extent, how much the rest of the top team should be compensated -- has a lot to do with a company's cash-flow and reinvestment needs, as -well as the owner's future plans for the corporation. Individual tax questions are also a very big part of the consideration.
"CEOs who own their own companies have to contend with questions that their counterparts in public companies never have to deal with," says Howard Miller, the national partner in charge of Peat Marwick's private-business advisory services practice. The decision-making process is fraught with tax dilemmas: "Do you take out salary and bonuses that will be taxed at, perhaps, 50%, or do you keep some or all of that money in the company, where it can't be taxed at more than 46%?" If the company's stock is sold, you will be taxed at capital-gains rates of not more than 20%, he points out. "So, if you're trying to send kids to college, maybe you take the salary. But if you don't have any heavy financial commitments, maybe you leave it in the company."
Keeping as much cash as possible in the company is the best choice for CEO-owners who have plans to sell out, liquidate, or bring the company public. Ask Pruchansky, who sold his company this past summer when Trend West Furniture Inc. made him an offer he couldn't refuse. If he had foreseen the sale, he would have held his salary down. "I would have wanted to build up my earnings," he explains. "Your selling price is always about 90% a function of that earnings figure. And, the less compensation you take out, the greater earnings you can show." Those same figures are used to determine the price-earnings ratio that convinces or dissuades would-be investors when a company makes an initial public offering, and they are the criteria for venture capitalists seeking out a deal.
There are plenty of owners, however, who aren't looking for that kind of payout. To them, "keeping it in the company" isn't so much a corporate-development strategy or a personal-investment decision as it is simply the way they prefer to do business. Some, like John Stearns, president and co-owner of Dixelle Co., a jewelry manufacturer in Pawtucket, R.I., see their mission as merely keeping costs down and the quality of their products up, partly to assure the day when they can pass the reins to one of their children -- in Stearns's case, a son. To that end, the G3-yearold Stearns hasn't taken a salary increase in five years. Instead, he has plowed profits back into the company, to make sure his son starts off debt-free. "Anybody who starts a small business has got to put his money back into that business," says the elder Stearns, "because if the business doesn't grow, it will die."
"I don't need more salary," he continues. "My compensation comes in knowing I've built a strong, healthy business."
Billy McCalmon wholeheartedly agrees with that philosophy. As secretary-treasurer, general manager, and part-owner of a $1.1-million family-owned salvage business, he has only to look at his check stubs to know that "there is no such thing as executive compensation at Lynnwood Auto Wreckers Inc.," in Lynnwood, Wash. "The company couldn't afford it," he says, grinning. He, his father, and his uncle operate the five-employee company "pretty much out of our checkbook." Just having the property, he says, is "both our compensation and our retirement." They are all on straight salary -- pretty minimal salary, at that -- but the company is a living, and it will be so for generations to come.
