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Arguing With Partners Over Compensation

November 13, 2021
By James Gussie

When negotiating with your partner over compensation, you should be aware that this may not always go smoothly. If one person is feeling slighted by the other’s salary request, there are ways to negotiate for a better outcome without fighting about it all day long.

Arguing with partners over compensation is a common occurrence. Every conversation turns into an argument and it can be difficult to avoid.

Here’s the email query I received today:

I just co-founded a company with four other people. A little amount of money has started to flow in, and two of the partners want to be compensated. What does it cost them to be compensated when others are not?

The question reminds me that many people conflate being compensated for your job with earning a profit. Although the concepts are straightforward, the tax treatment is not, therefore accountants and lawyers are essential. So ponder it for a moment. Let’s focus on the major topics for now.

Fairness is generally an issue of market value, and all companies should pay all workers fairly for their labor. A programmer may be paid $40 per hour, whereas a data entry clerk may be paid $20. Most occupations fall into one of many categories, and individuals either know or can learn how much other businesses pay for similar positions in a similar market.

It shouldn’t matter who owns the property. Owners who work as employees should be treated as such, and their labor should be properly compensated. I’m referring to both the legal and practical aspects of the situation. Owners who work in the company are required by law to be workers, whereas owners who do not work in the business are not required to be employees. According to tax law, owners who work should be paid a salary, and the government collects taxes from both the employer and the employee, the company and the owner-employee. On the other side, money paid to non-working owners should be treated as dividends, not compensation, since dividends are taxed differently. As a result, the fundamental concept is that remuneration is based on the job performed.

Consider the definitions of the terms compensation and return on investment.

Aside from tax implications, combining ownership return with pay skews fundamental business figures. If owners accept no pay, costs will be exaggerated and earnings would be underestimated. If owners labor for free and live off earnings or receive a salary, costs will be underestimated while profits would be exaggerated. It’s not a good idea to hide business realities.

In the context of a company strategy, I usually suggest that the figures include treating working owners as workers. Their pay is included in the personnel plan with that of all other employees. In certain instances, receiving compensation from earnings may provide tax benefits, however this is a poor approach. It obscures the true character of the company.

So, in your situation, I won’t be able to properly answer your question since you left out some crucial facts. Are the two partners who wish to be compensated employees of the company? Is it true that the two who don’t want it don’t work in the company? I’m sure you can figure out what I’m about to say. Pay any and all partners who work in the company a fair pay based on market value for the job they perform. Also, don’t compensate people that don’t put forth any effort. The four owners then take their part of the earnings as a draw, or not, or reinvest it in the company, or whatever, at the end of the year, when the months complete and all costs are paid. At that time, the conditions are obvious, and profits are what’s left after expenditures. Profits are shared among owners in proportion to their ownership stake.

After all of that, it wouldn’t be fair if I didn’t mention that the complexities of tax law may lead to some strange or twisted variants in certain instances. Sole owners in extremely small companies, for example, are very frequent in taking regular draws from the company but not treating themselves as employees. It’s typically a tax-related alternative world in that scenario. There are also a slew of other odd variants.

In general, I recommend keeping things simple, but anticipate to discuss the specifics with your attorney or accountant, or both. Just remember that the company pays the people who work, and the profits for the owners come from what’s left over after all the expenditures and expenses have been paid.

Arguing with partners over compensation is a constant problem in relationships. The “constant arguing in a relationship” is an issue that affects the health of any partnership.

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