2Bobs—with David C. Baker and Blair Enns A 7-part Theory of Principal Compensation
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Jan 31, 2024 The hosts discuss the conflicts that arise when determining principal compensation in firms with multiple owners. They explain the three components of compensation - ownership, work, and risk. They explore the various forms of risk associated with lending money to a company. They also delve into the principles of partner compensation, including ownership percentage and contribution level.
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Three Separate Compensation Streams
- Owners get paid for three distinct things: ownership (profit), what they do (salary), and specific risk (e.g., loans to the company).
- These three components must be treated separately when structuring partner compensation.
Price Owner Loans Above Market
- Charge a premium when an owner loans personal capital to the firm to reflect higher risk.
- Baker suggests roughly 3–4 percentage points over prime as a starting formula.
Unique Roles Reduce Comparison Wars
- Best partnerships let each principal contribute uniquely to avoid direct comparison of value.
- Unique roles reduce compensation disputes because contributions are harder to equate head-to-head.