Corporate Officer Compensation
The procedures for compensating a corporate officer and setting corporate officer compensation will depend on the type of business entity in operation, the industry, the entity’s profitability, and the corporate bylaws and/or operating agreement. In general, corporate officer compensation is permitted so long as it is “reasonable” for their efforts in carrying on a trade or business. In such cases, a corporate officer is often considered an employee of a corporation, and is paid as such. For corporate officers who are not employees, they will have a different compensation structure, or none at all.
Employees must be paid, and usually an officer is an employee of the corporation. If a case concerning corporate officer compensation goes before a court, it will usually concern whether a corporate officer’s pay was “reasonable.”
Courts consider the following factors in determining if the corporate officer compensation is reasonable:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-officer employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
A corporate officer’s base salary is usually dependent on the growth and profitability of the company. In many modern corporate pay structures, there is a set base salary and an additional year-end bonus based on profits. The base salary is generally a figure based on the competitive rate of pay for people in similar jobs in the same industry and in similar sales-volume companies, and the year-end bonus is based on the productivity and success of the corporation in any given year.
Smaller enterprises may have different methods of determining corporate officer compensation, and what is “reasonable” to them will vary from larger C-Corporations. For example, small S-Corporations and LLCs may pay out all of the company profits to the owners, whereas larger operation may only pay out corporate revenue.
Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business, contract, and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law needs.